The Federal Reserve System, or Fed, takes two types of stances when it comes to monetary policy. It can be difficult to tell from the tone of the statements whether they are dovish or hawkish. It pays to familiarize yourself with the terms and what they mean if you want to figure out how it affects your assets.
What Dovish And Hawkish Mean
A dovish tone from the Fed basically means that they are contemplating the potential growth of the economy, and intend to loosen monetary policy accordingly. A dovish tone is an indicator that interest rates are going to be slashed. A hawkish tone, on the other hand, means that the Fed is taking an aggressive stance on the monetary policy, and intends to tighten it considerably. This means that the Fed funds rate could potentially increase, along with inflation.
An easy way to remember the difference between the two is to look at the words themselves: hawk and dove. A hawkish stance is predatory and aggressive, while a dovish stance is timid and cautious. The words can also apply to individual policymakers who have specific approaches to fiscal policy.
How To Decipher The Stance ?
Figuring out the Fed’s approach from statements is so difficult that it is considered an art form. Different people decipher statements in different ways. Seasoned Fed watchers become better at interpreting statements because they all have a method of scanning the statement for a specific Fed language. This language act as a clear marker of their stance.
How Does This Affect Asset Classes?
Unless you’re in a general bull market, stocks actually decrease in value when interest rates rise. It also becomes hard to hold cash when interest rates skyrocket. When they are slashed, however, your bonds will all increase in value.
What To Expect From The Fed?
The best way of finding out what to expect from the Fed in terms of managing fiscal policy in the coming year is to take a look at the manner in which they have influenced the stock market in the past.
The Fed has been accused of contributing largely to the United States Housing Bubble, that took place just before the recession in 2007. By keeping interest rates too low after the recession in 2001, they caused the housing bubble that then led to the credit crunch. However, the Fed has pointed out that they only have indirect control over long-term interest rates, and that they did raise short-term interest rates.
The Fed has received a large amount of bad press, and has been accused of everything from being in the hands of a small group of the elite, who hold Class A Fed stock, to monetizing the debt by printing money in order to buy government bonds. Some of these are found in logic, while others are not.
The failed examples of communist and socialist governments prove that governments that control or prohibit private businesses to a large extent cannot hope to survive. So it’s clear that the United States government would benefit hugely from a re-evaluation of the Fed’s power and responsibilities, subjecting them to consistent transparency checks and auditing. This would protect private businesses from unnecessary interference from them.
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