Welcome to The Signal’s weekly “Macro Minutes.” Each week, we analyze the most important communications from a specific region and provide insight based on our quantitative analysis of central banks.
As expected, the FOMC raised interest rates by 25bps today. The statement contained moderately hawkish* language (residual** 0.27) that continued the Fed’s hawkish trend. In her remarks, Yellen reinforced this trend, emphasizing that the committee is only modestly more hawkish now than at previous meetings.
Certain aspects of the hawkish language were particularly noteworthy, namely the absence of the qualifying word “somewhat” when referring to higher inflation expectations. For the markets already pricing in a 25bps hike, the Fed’s Summary of Economic Projections (SEP) was perhaps more impactful, indicating a steeper rate path in 2017, 2018, and 2019. However, Yellen emphasized repeatedly in her press conference that this is only a marginally higher equilibrium rate in the long run.
Today’s SEP reveals that the central tendency of the committee now points to three 25bps rate hikes in 2017, as opposed to the two rate hikes suggested at the September meeting. 2018 and 2019 show similarly small upward revisions. This steeper path reinforces the Fed’s hawkish communications, and markets have already reacted with bonds—particularly short-term bonds—rising significantly.
The bottom line: today’s rate hike and hawkish language coupled with the Fed’s rising sentiment signal overall tighter policy in 2017.
The Signal Team
* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness.
** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications. Momentum is the average the last ten residual scores.
Disclaimer: the forecasts provided herein are based upon sources believed by Prattle Analytics, LLC D/B/A Prattle, to be reliable and to be developed from models which are generally accepted as methods for producing economic forecasts.
Prattle cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.
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