The secret language of central banks – 6 terms demystified!

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Reading Time: 5 minutes

Central banks have tremendous influence over global financial markets and national economies. The performance of basically every asset class is directly associated with the fiscal policy that a central bank is currently following. Press releases and conferences of central bankers such as the chairman of the Federal Reserve (FED) Powell or the president of the European Central Bank (ECB) Christine Lagarde are watched vigilantly by global investors. Investors and politicians are keeping a close eye for the slightest hint in the central bankers statements that may imply a potential change in upcoming fiscal policy. This is now true more than ever.
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Policy makers are well aware of this fact, which is why they remain very cautious in what they say and chose their words very carefully. The slightest misunderstanding will have immediate impact on the financial markets and can even result in an immediate downfall of global stocks and equities. In order to avoid such misunderstandings, central banks are mitigating that risk by using obscure terms, which are not easy to understand by the average investor. Most of the terms used in the banking area are originating from the animal world. From the science of ornithology to be even more specific – roovestor has you covered. This article will help you to demystify and understand 6 terms that are commonly used by central banks. After reading this article, understanding these terms will be a walk in the park for you.
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1. Hawks

In central banking, the term hawk is often used to describe a banker or a policy maker that is predominantly concerned with and focused on the potential impact interest rates. In general a “hawkish” policymaker is someone who tends to allow interest rates to rise in order to keep inflation under control. Brazilian central banker Roberto Campos Neto was recently described as the worlds most hawkish central banker, as he was rising interest rates very sharply in response to an ever increasing local inflation rate in Brazil.

2. Doves

In contrast to Hawks, “Doves” are perceived to be in favour of a monetary policies that focusses on stimulating the economy and supporting employment. Hence, Doves prefer lower interest rates and support a loose monetary policy. In 2021’s annual Jackson Hole Forum, Jerome Powell’s (Chairman of the Federal Reserve) statements were described as particular dovish by Bloomberg. Powell stated that “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” Hence, a tapering from interest rate hikes is not expected within the next few months. In financial news, central bankers are often described as either Hawkish or Dovish based on their policies and statements uttered in press conferences.

3. Pidgeons

Another metaphor that is often used in the context of central banks is the “Pidgeon”. A pidgeon is a central banker that takes a position in between the two aforementioned (e.g. Hawks and Doves). A pidgeon is someone that is likely to postpone certain decisions – which in fact means that existing policies will be kept in place.

4. Owls

The Owl is a rather new metaphor that joined the group of other birds only recently. The chairwoman of the European Central Bank, Christine Lagarde described herself as an Owl and said the following during her first press conference as the leader of the ECB in 2019: “I’m neither a dove nor a hawk. My ambition is to be this owl, that is often associated with a little bit of wisdom.” With describing herself as an owl, Lagarde was trying to escape the binary limitations that come with the Hawks and the Doves. In general, Owls favour a very colleaguial leadership style, which means to listen carefully to others and to foster lively discussions in order to reach common decisions.

5. Green Swans

In the world of central banking, the Green Swan metaphor describes an extremely financially disruptive event. But unlike black swan events, green swan events stem from the impact of climate crisis. While the impact of a green swan event is also severe and there may be uncertainty what the impact will look like conceretely, it is hard to argue that we did not see this one coming. The failure to prepare for a green swan event is what it makes it so dangerous.

6. Ostridges

While the green and the black swan are actual events, the Ostridge is often used as a metaphor to describe a certain behavior of investors. For instance, Ostridge investors are those who tend to dislike or are oblivious to financial losses that they might incur. Ostridges generally simply ignore the risks and losses they have experienced and pretend as if those risks do not exist. They just hope that the risks will somehow disappear. The metaphor itself comes from the common (but also entirely false) legend that Ostridges would bury their heads in sand to avoid danger.
Listen to this ECB podcast episode to get even more insights into the terms discussed above! Also note, that this article is very much based on the discussions in this podcast.

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