Graphing New Fed Voters Versus Old Suggests Rate Hike Isn’t Looming

  • Wednesday, January 28, 2015

Erik Holm—The Wall Street Journal

When it comes to the Fed, you can never have too many dots.


The graph above, generated by a research firm called Prattle Analytics, tracks the sentiment of speeches and other communications from the members of the Federal Open Market Committee. Using an text-analysis algorithm developed by the firm’s two founders, it boils down the words from each communication into a single number that shows how positive–or negative–they are about the state of the economy.

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The dots indicate the sentiment of specific statements from presidents of some of the regional Fed banks, with the red dots indicating regional Fed presidents who were voting members of the FOMC in 2014, and the green dots showing the four with votes in 2015. The red and green lines show how those statements are trending over time. The blue line offers the same measure for the entire committee–voting and non-voting members alike.

Whether they’re voting members or not, all the regional presidents have a seat at the table when the committee meets to deliberate–as they did this week. Fed-watchers sometimes debate whether  the voting regional presidents truly have more say on Fed policy than the ones who have rotated out of that role.

But if they do, the results of the graph may be a mild surprise to some investors and analysts who think they know where the Fed is headed in 2015. Fed-watchers agree that the new voters–Atlanta Fed President Dennis Lockhart, San Francisco Fed President John Williams, Chicago Fed President Charles Evans and Richmond Fed President Jeffrey Lacker–are in aggregate a more dovish group than the outgoing one. The data from Prattle back that up. But the chart shows that they’re still more hawkish than the committee as a whole.

Ultimately, the blue line is the most important for predicting when the Fed will finally raise rates. And it isn’t exactly sounding an alarm right now. While the committee was growing more optimistic over the first few months of 2014, that’s no longer the case. When all the Fed communications are evaluated in aggregate, the trend line has been right around zero since late summer, signifying neither positive nor negative sentiment.

In an email, Prattle chief executive Evan Schnidman explained what that means for Fed policy–and the stock market:

The combination of slow global growth, disinflationary pressure, and central banks around the world pursuing increased stimulus all points toward the Fed likely delaying a rate increase until later than previously indicated. Janet Yellen’s early 2014 suggestion that the Fed could raise rates 6 months after the end of QE has been supported by recent indications that the Fed could raise rates as early as April, but global conditions combined with the makeup of the voting members of the FOMC make this exceedingly unlikely. If anything, recent rate cuts by Canada and India coupled with stimulus by the ECB and the dissolution of the currency peg by the Swiss indicate that the slightly more dovish 2015 Fed has an excuse to be dovish in an effort to ensure the dollar does not become too strong. This creates a situation where U.S. economic growth is likely to be among the strongest (of developed countries) through 2015, thus buoying equity markets while interest rates could remain pegged to the zero-bound well into the third quarter of this year and possibly beyond.

Want to take a deeper dive into some of the Fed communications to see if your words match Prattle’s quantitative analysis? A slideshow for the most positive speech shown above, the green dot in June, is here. It’s a presentation from Mr. Fisher that Prattle scored as +4.78.  The most negative, the red dot in early December, is a talk from the Dallas Fed’s Richard Fisher. It scored -0.72 and is available here.

The Prattle Team,

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