From time-to-time economists and financial advisors come up with a solution to save the Economy. They formulate policies and strategize monetary flows to protect the financial system.
To reduce and, to an extent, prevent inflation, a specific policy would come as a savior. Also known as contractionary or tight monetary policy, Hawkish policy plays a vital role in an economy’s financial system. However, higher interest rates make this policy more expensive for consumers and businesses that borrow money.
As consumers and businesses spend less money, a country’s Economy will grow slowly and may contract. This will result in the prices of goods and services stabilizing. Thus, halting inflation.
What is HMP?
HMP is a monetary policy that helps reduce inflation or prevent rising rates. A ‘hawk’ is an economist who focuses on preventing inflation. They are a person who thinks of the adverse effects of inflation.
This monetary policy, also called the tight monetary policy, comes into practice when a central bank wishes to compress financial liquidity in two ways:
- You can increase the FED fund rate, a target interest rate that banks charge over others for overnight loans. Banks, in turn, charge interest to their customers. Hence, this rate is also known as the prime rate.
- The FED can also lessen the number of treasuries or mortgage-backed securities through imperative measures.
HMP in depth
Hawkish policymakers are primarily concerned with the risk of inflation. Therefore, they always try to keep an eye on rising prices or wages. This can be done by increasing interest rates. Thus, reducing the supply of money and limiting the Economy’s growth.
When interest rates go high, borrowing becomes costly for consumers and businesses. As a result, these people take loans to make purchases and investments.
Hawks can be tough on people searching for work as employment tends to increase quickly. However, the policies benefit people living on fixed incomes because their purchasing power doesn’t decline.
How HMP helps the Economy?
The Federal Reserve has two goals; stabilizing the prices and maximizing employment. While both goals are equally important for the government, the policies supporting each can differ.
The HMP focuses on the higher interest rate. This kind of monetary policy is helpful when there is an issue that inflation is and will be higher than the government target of 2%.
The Federal Reserve aims to keep inflation at 2% in the long run. This is because it consistently balances price stability and maximum employment.
Effects Of The Policy
Government policymakers usually use the goal of inflation to guide their decisions. So if prices rise faster, the trend will continue, and the hawks will come out.
When the interest rates are likely to increase, inflation tends to be at or under 2% of the targeted annual inflation rate.
Unemployment would be on the rise. However, there may be difficulty in borrowing money and finding better jobs. It can pose significant problems for all the consumers and policymakers who will feel the burden of avoiding the interest.
Hawkish Policy Tools
The policy usually works on some essential tools, which are discussed as follows:
- The Discount Rate: This interest rate is charged by the Fed. It eventually charges a higher rate of interest on the loans.
- Interest on reserves: The Fed pays bank interest on the money the bank must keep in reserve.
The Federal Reserve Board is taking a cautious approach to raising interest rates. This cautiousness is likely due to the current economic climate, which is still fragile. The HMP will likely continue to be a balancing act for the Fed to maintain healthy growth while preventing inflation from getting out of control.
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