Hawks vs. Doves

You may have come
across news citing central bank members being hawkish or dovish. These are
terms used to describe a member’s stance on monetary policy.

In general, “hawks”
are the members who tend to prefer a tighter monetary policy while “doves” tend
to support a looser monetary policy.

Traders classify hawks and doves based on recent speeches and voting patterns by the
respective members. Central bank members generally don’t describe themselves as
hawks or doves.

The market tends
to ignore comments from members that are in line with their usual stance. So,
if you have a hawk talking in a hawkish way, that won’t cause much of a reaction
because it’s already known.

On the other hand,
if a central bank member deviates from his/her usual stance, that makes it much
more compelling and triggers a reaction as the market prices in the new
information as that could foreshadow a change in monetary policy.

There’s also kind
of hierarchy of importance. For example, if we take the Federal Reserve, the most
influential members are the Fed Chair, the Vice Chair and the President of the
New York Fed (These three are also called the “troika”). Then you have the
Board Governors and finally the four Presidents from the regional Federal
Reserve Banks that rotate annually.

Following central bank members’ speeches and comments is important because it can give you a general view on their thinking and sometimes even clues on what to focus on for a change in monetary policy.

This article was written by Giuseppe Dellamotta at www.forexlive.com.