The Fed’s Neutral Narrative | Macro Minutes

  • Thursday, April 28, 2016

Welcome to Prattle’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 widely anticipated, the FOMC announced that it would hold the Federal Funds Rate at 0.5% this week. On the heels of several hawkish speeches from regional Fed presidents, this announcement encouraged analysts to speculate that a June rate hike may be in the cards—with another hike in December likely on the table.

This theory sounds reasonable…but what does the data* say?

To provide context for our analysis, let’s take a closer look at each meeting since the hike:

December: The FOMC announces a rate hike despite releasing a dovish (-0.96) statement, causing the markets to immediately react. Once analysts identify the dovish language within the release, the markets quickly correct themselves, but not without significant fluctuations by close of business.

January: After the markets dive in Q1, the FOMC releases a less dovish (-0.35) statement, presumably in defense of the December rate hike and to encourage a positive economic outlook for 2016.

March: The FOMC continues its hold on rates and releases a dovish (-0.98) statement, signaling that an April rate hike is highly unlikely.

April: The FOMC holds rates again, this time releasing a slightly less dovish (-0.56) statement. Speculation over a June rate hike increases after a series of hawkish speeches from regional Fed presidents that, combined with the FOMC statement release, cause the Fed’s average sentiment score to even out at a neutral -0.02.

FRCApril28

The Fed’s recent hints at a June rate hike match analyst’s theories from Q4 2015 that the bank would pursue a gradual rate hike path throughout 2016. Judging from the data currently available, the FOMC seems satisfied with the economy—despite weak Q1 growth—and is likely to raise rates in June as well as December.

The Prattle Team

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*Prattle scores are quantitative measures of the mood of central bank communications. They are produced from an algorithmic analyses of the relationship between these communications and market fluctuations. The scores are normalized around zero and fall between -2 and 2—each indicating two standard deviations from the mean.

Featured image: “The Eccles Building”; by AgnosticPreachersKid