Loading the player...

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.

 

RELATED TERMS
  1. Hawk

    A hawk is a policymaker or advisor who focuses on interest rates ...
  2. Interest

    Interest is the charge for the privilege of borrowing money, ...
  3. Reference Rate

    A reference rate uses benchmarks, like the prime rate and the ...
  4. Real Interest Rate

    A real interest rate is one that has been adjusted for inflation, ...
  5. Interest Sensitive Stock

    An interest sensitive stock is a stock that is especially sensitive ...
  6. Federal Funds

    Federal funds are excess reserves that commercial banks deposit ...
Related Articles
  1. Investing

    How Do Interest Rates Affect the Stock Market?

    Interest rates can have a complicated ripple effect through financial markets. Learn more about how they specifically impact the stock market.
  2. Insights

    When Will Interest Rates Rise?

    Find out if -- and why -- the Federal Reserve will keep raising interest rates and what that might mean for savers, investors and the entire economy.
  3. Insights

    Understanding Janet Yellen's Role On Interest Rates

    Learn about Janet Yellen's role at the Federal Reserve. At first she was known as a dove, but Yellen has actually been quiet hawkish.
  4. Investing

    How Interest Rates Affect Mutual Funds

    Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors.
  5. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  6. Personal Finance

    How interest rate cuts affect consumers

    Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here.
  7. Investing

    How Negative Interest Rates Can Affect Banks' Bottom Lines

    Examine the impacts of low interest rates on banking industry profits and find out if negative interest rates will have a more extreme effect.
  8. Trading

    Why Interest Rates Matter For Forex Traders

    Interest rates are crucial to day traders due to the higher the rate of return, the more interest accrued on currency invested and the higher the profit.
RELATED FAQS
  1. How successful have "dove" Federal Reserve heads been in the past when it comes to ...

    Review a short history of "dovish" leaders of the Federal Reserve, who use U.S. monetary policy to reduce unemployment through ... Read Answer >>
  2. What are the implications of a low federal funds rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  3. Who determines interest rates?

    Learn who determines interest rates. In countries using a centralized banking model, interest rates are determined by the ... Read Answer >>
  4. How does a high discount rate affect the economy?

    A high discount rate causes loans to be more expensive and encourages people to save more money. This could be considered ... Read Answer >>
  5. How do interest rate changes affect the profitability of the banking sector?

    Learn how interest rates affect the banking sector. When interest rates rise, the profitability of the banking sector increases. Read Answer >>
Trading Center