Inflation Hawk

Hawk flying with caught fish

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What Is an Inflation Hawk?

An inflation hawk, also known in monetary jargon as a hawk, is a policymaker or advisor who is predominantly concerned with the potential impact of interest rates as they relate to fiscal policy.

What does it mean to be hawkish? Hawks are seen as willing to allow interest rates to rise in order to keep inflation under control, even if it means sacrificing economic growth, consumer spending, and employment.

A hawk can be contrasted with a dove.

Key Takeaways

  • Hawks are policymakers and advisors who favor higher interest rates to keep inflation in check.
  • Inflation can occur when economic growth "overheats," which higher interest rates are thought to moderate.
  • The opposite of a hawk is a dove, who prefers an interest rate policy that is more accommodative in order to stimulate spending in an economy.
  • Depending on the state of the U.S. economy, policymakers may shift between a hawkish or dovish stance.
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Hawk

Understanding Inflation Hawks

A hawk generally favors relatively higher interest rates if they are needed to keep inflation in check. In other words, hawks are less concerned with economic growth and more focused on the potential of recessionary pressure brought to bear by high inflation rates.

Whether being hawkish is a good or appropriate stance will depend on the strength of the economy and other macroeconomic factors. This is because hawkish policies that can lower inflation can also lead to economic contraction and higher unemployment, and can sometimes backfire and lead to deflation.

Although it is common to use the term hawk as described here in terms of monetary policy, it is also used in a variety of contexts. In each case, it refers to someone who is intently focused on a particular aspect of a larger pursuit or endeavor. A budget hawk, for example, believes the federal budget is of the utmost importance—just like a generic hawk (or inflation hawk) is focused on interest rates. A war hawk, similarly, pushes for armed conflict to resolve disputes as opposed to diplomacy or restraint.

The opposite of a hawk is known as a dove, or an economic policy advisor who prefers monetary policies that involve low-interest rates. Doves typically believe that lower rates will stimulate the economy, leading to an increase in employment. 

Advantages and Disadvantages of Hawkish Policies

Advantages

Although the word hawk is often levied as an insult, high-interest rates can carry economic advantages. While they make it less likely for people to borrow funds, they make it more likely that they will save money.

In some cases, banks end up lending money more freely when interest rates are higher. High rates dissipate risk, making banks potentially more likely to approve borrowers with less than perfect credit histories. Moreover, if a country increases interest rates but its trading partners do not, that can result in a fall in the prices of imported goods.

Disadvantages

Higher interest rates can become deflationary, making prices cheaper. While this can be a short-term positive, deflation can often be worse than moderate inflation in the long run. Persistent deflation means that a dollar tomorrow will be worth more than one today, and worth even more in a week or a month. This incentivizes people to hoard money and put off large purchases until much later, when ostensibly they will be even less expensive in terms of the dollar's greater purchasing power.

With higher interest rates, consumers will borrow less and spend less on credit. Higher mortgage rates will also put a damper on the housing market and can see housing prices fall, in turn. Higher rates on car loans can have similar effect in the automobile market.

Hawkish policies will likewise tend to reduce a company's desire to borrow and invest, as the cost of loans and interest rates on bonds rise. Moreover, companies will be less eager to hire and retrain workers in such an environment.

Hawkish policies can also impact domestic manufacturers and trade. If the relative inflation rate in the home country is falling relative to the inflation rate in a trading partner, the exchange rate should adjust to keep prices in line with the dollar appreciating relative to the trading partners. When the home currency strengthens, the prices of imported foreign goods become relatively cheaper, hurting domestic producers. At the same time, domestic exports become relatively more expensive for overseas consumers, further hurting domestic manufacturing.

Hawkish policies tend to favor savers and lenders (who can enjoy higher interest rates. It also makes imports and traveling abroad cheaper.

They tend to negatively impact borrowers and domestic manufacturers. It also makes exports and domestic tourism more expensive.

Pros and Cons of Hawkish Policy

Pros
  • Can stem runaway inflation

  • Increases the savings rate

  • Cheaper imports

  • Tourists to foreign destinations have greater purchasing power

Cons
  • Can hurt domestic producers

  • Makes borrowing more expensive for consumers and firms

  • Can lead to deflation

These aren't the only instance in economics in which animals are used as descriptors. Bulls and bears are also used, where the former refers to a market affected by rising prices, while the latter is typically one where prices are falling.

Who Is Considered an Inflation Hawk?

Esther George, the Kansas City Federal Reserve (Fed) president, is considered a hawk. George favors raising interest rates and fears the potential price bubbles that accompany inflation.

Loretta Mester, the Cleveland Fed president, also fits into this category. Mester studied under Charles Plosser, the former president of the Fed Bank of Philadelphia and a committed hawk. She worries about inflation caused by the low-interest rates championed by doves.

Of the current voting members of the Fed, Raphael Bostic, the Atlanta Fed President, is considered to be quite hawkish.

Why Is it Called "Hawkish"?

"Hawks" and "Hawkish" policy are more aggressive in nature, whether it be in terms of monetary policy or military stance during a potential conflict. It is so-named after hawks, the aggressive birds of prey.

The opposite of a hawk is a "dove" and "dovish" policies are seen as more meek or conservative. These epitomize the peaceful symbolism of another bird, the dove.

Can Hawks Become Doves and Vice-Versa?

Yes, as the recent history of U.S. Fed leadership shows.

Alan Greenspan, who served as chair of the Fed between 1987 and 2006, was considered to be fairly hawkish in 1987, but he changed over time to a relatively dovish stance. Ben Bernanke, who served in the post from 2006 to 2014, also alternated between hawkish and dovish tendencies. 

Janet Yellen, Fed chief from 2014-2018, was generally seen as a dove who was committed to maintaining low lending rates. Jerome Powell, named to the post in 2018, was rated as "neutral" (neither hawkish nor dovish) by the Bloomberg Intelligence Fed Spectrometer.

How Are Interest Rates Determined?

At eight annual meetings, a group from the Fed examines economic indicators such as the consumer price index (CPI) and the producer price index (PPI) and determines if rates should go up or down, or stay the same. Those who support high rates are hawks, while those who favor low-interest rates are labeled doves.

High-interest rates make borrowing less attractive. As a result, consumers become less likely to make large purchases or take out credit. The lack of spending equates to lower demand, which helps to keep prices stable and prevent inflation.

In contrast, low-interest rates entice consumers into taking out loans for cars, houses, and other goods. Consumers spend more and, ultimately, inflation occurs.

It is the Fed's responsibility to balance economic growth and inflation, and it does this by manipulating interest rates.

The Bottom Line

Inflation hawks adopt policies to quickly stamp out inflation such as aggressively raising interest rates and other contractionary measures. Inflation hawks believe that low target inflation rates, around 2-3%, should be maintained, even it comes at the expense of economic growth or employment. The opposite policy stance is to be dovish.

Article Sources
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  1. Baird Private Wealth Management. "Introducing the new Federal Reserve Chair Jerome Powell." Accessed April 21, 2021.

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