Judgment Day: Will The Fed Raise Rates?

  • Thursday, September 17, 2015
EC50CC8658

The much anticipated September FOMC meeting is upon us, and the financial world has waited with baited breath to see whether or not a rate hike is imminent.

Prattle’s algorithm has scored the press release, which declared that rates would hold, as -0.64 dovish (positive numbers are hawkish and negative scores dovish).

Compared to Prattle’s scores of recent press releases, today’s press release is almost a perfectly neutral score: -0.06. This means that the committee as a whole is still trending relatively dovish–even though recent individual communications were trending hawkish.

In fact, despite volatile market conditions, the mood of the Fed officials over the last 6 weeks showed a dramatic acceleration toward hawkishness. Generated using our algorithmic analysis of Fed communications, the graph below portrays the trend in the mood of the central bank (represented by the blue line) since the start of the year.

image

While the Fed has certainly become more hawkish of late, the graph illustrates that this latest hawkish push has only brought the Fed’s mood back to the levels seen in June–and hadn’t yet matched sentiment values seen in January.  This development indicated to Prattle that Fed officials increasingly wanted a hike, but deteriorating market conditions were, for the moment, holding them back.

This interpretation, however, was a judgment call on our part. It is not readily apparent whether the slope (i.e. acceleration) of the trend or the current value of the mood is more important in predicting the Fed’s timing. For investors, we emphasize paying attention to the slope of the data (rising slope means a strengthening economy and likely tighter policy), while, for policy analysts, we know that both matter.

Today’s press release fell in line with our most recent interpretations of the central bank’s mood–and Prattle forecasts dating back weeks–once again evidencing the value of an algorithmic analysis of central bank communications trained on the complexities of that domain’s language.

Bottom line: Fed sentiment simply was not high enough today to justify a rate increase in these tumultuous markets. However, rising sentiment still points to a rate hike later this year.

The Prattle Team,
click here to subscribe to the signal blog