Dovish Vs. Hawkish: Which Way Will The Fed Lean This Week?

The U.S. Federal Reserve is set to gather today (Tuesday) and tomorrow (Dec. 15-16), and members will decide if they’ll raise interest rates for the first time in nearly a decade.

The dovish vs. hawkish Federal Reserve argument has been discussed all year, but many investors don’t know what the two terms mean and how they affect their portfolios.

Here’s a breakdown of the dovish vs. hawkish debate…

Dovish vs. Hawkish: What Do They Mean?

A “dovish” means the bank favors monetary policies that involve low or zero interest rates. Dovish members believe inflation has a negligible effect on the economy because low interest rates increase consumer spending and bolster economic growth.

“Doves” also prefer quantitative easing as a way to stimulate the economy. Quantitative easing is when the U.S. government transfers a government bond from a commercial bank’s balance sheet to its own. The bond then shows up as an asset on the Fed’s balance sheet. Once the transfer is completed, the Fed credits the commercial bank with that bond’s value. These transactions alleviate banks’ debt loads and increase economic activity.

Dovish central bank members like low interest rates because they generally keep more money in circulation. That means it makes the stock market a more attractive place to invest. However, this can be a double-edged sword since prolonged periods of low interest rates can lead to excess spending and inflation.

Until this month, Federal Reserve Chairwoman Janet Yellen has been considered by many to be a “dove.” Since assuming office on Feb. 3, 2014, Yellen has kept interest rates at their current level near zero.

On the other hand, a “hawkish” Federal Reserve favors high interest rates as a way to effectively manage inflation levels. That means the bank is more concerned with avoiding a high inflation-related recession rather than boosting economic growth.