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What is a 'Dove'

A dove is an economic policy advisor who promotes monetary policies that involve low interest rates, based on the belief that low interest rates increase employment. Statements that suggest that inflation has few negative effects are called dovish.

BREAKING DOWN 'Dove'

Doves prefer low interest rates as a means of encouraging economic growth because they tend to increase demand for consumer borrowing and spur consumer spending. As a result, doves believe the negative effects of low interest rates are relatively negligible. However, if interest rates are kept low for an indefinite period of time, inflation rises.

Derived from the placid nature of the bird of the same name, the term is the opposite of "hawk." A hawk is, conversely, someone who believes that higher interest rates will curb inflation. 

This isn't the only instance in economics where animals are used as descriptors. Bull and bear are also used, where the former refers to a market affected by rising prices, while the latter is typically one when prices are falling. 

How Do Hawks and Doves Work Together?

Doves attempt to protect consumers, increase spending and boost job growth by lowering interest rates. However, hawks keep their actions in check by insisting upon high interest rates to guard against inflation.

What Are Some Examples of Doves?

In the United States, doves tend to be members of the Federal Reserve who are responsible for setting interest rates, but the term also applies to journalists or politicians who lobby for low rates as well. Ben Bernanke and Janet Yellen are both considered doves for their commitment to low interest rates. Paul Krugman, an economist and author, is also a dove because of his advocacy for low rates.

But people don't necessarily have to be one or the other. In fact, Alan Greenspan, who served as chairman of the Federal Reserve between 1987 and 2006, was said to be fairly hawkish in 1987. But that stance changed, as he started to become dovish in his outlook of the Fed's policies. That lasted well into the 1990s. 

How Are Interest Rates Determined?

Eight times per year, the Federal Open Market Committee (FOMC), a branch of the Fed, meets to discuss interest rates. Using a number of key indicators, this group sets the nation's interest rates. The rate it sets determines the rate regional Federal Reserve Banks charge banks or other depository institutions on overnight loans. Although this rate doesn't dictate what interest rate banks should charge to their clients, it heavily influences that rate.

For example, if a bank is paying just 2 percent to borrow funds from the Federal Reserve Bank, it is likely to offer its clients a low rate. However, if a bank has to pay 20 percent to borrow funds from the Fed, as happened repeatedly in the 1980s, it is going to pass those high rates to its borrowers.

How Do Low Interest Rates Spur Consumer Spending?

When consumers face low interest rates, they become more likely to take out mortgages, car loans and credit cards. This creates a flurry of spending, which affects the entire economy.

How Do Low Interest Rates Lead to Inflation?

Increased consumption creates jobs, affecting almost every sector of the economy, such as retail shopping, building new houses and manufacturing products. Eventually, however, the flood of demand, called aggregate demand, leads to increases in price levels. Additionally, because employment is high, workers tend to earn relatively higher wages, giving them the ability to buy products even if prices are rising. This ultimately leads to a cycle of price increases and wage increases that create inflation.

 

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