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Fed Facts: Doves Versus Hawks -- What's The Difference?

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Fed Facts: Doves Versus Hawks -- What's The Difference?

Traders often hear the terms “dovish” and “hawkish” tossed around when it comes time for a Federal Reserve meeting. If you’ve ever wondered why economists are worried about birds instead of important monetary policy decisions, this article is for you.

Dovish and hawkish are adjectives used to describe the type of language used by the Federal Reserve members when they release statements or give speeches on the economy. Hawkish language is language that suggests the Fed will take a more aggressive approach to monetary policy, such as raising interest rates or dialing back economic stimulus. Hawks are typically seen as aggressive predators.

Doves on the other hand, are gentile and docile birds. When the Federal Reserve uses dovish language, it suggests a much more accommodating monetary policy. That could mean anything from an interest rate cut to quantitative easing to simply maintaining historically-low interest rates.

Related Link: Terms Of The Trade: Contrarian Investing

For example, the Federal Reserve issued its first interest rate hike in more than a decade in December 2015. While the rate hike itself was a hawkish move, the Fed used as much dovish language as possible in its statement to reassure financial markets they would be easing back into higher interest rates slowly.

The following except from the Fed’s statement was particularly dovish:

    “The Committee expects that economic conditions will evolve in a matter that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Now that you know the difference between dovish and hawkish language, you can join the analysts that pour over the language in every Fed statement like children looking to spot their favorite animal at the zoo.

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