Today’s FOMC statement announcing a 25bps rate hike was just barely on the hawkish* side of neutral (residual** score 0.05). This signals that the Fed’s recent hawkish language was intended to set the stage for this hike without representing a sustained hawkish shift. The SEP reinforces this message with broad consensus for three hikes this year, but almost no pressure for four or more. Like many in the market, our statistical model projected a more hawkish FOMC statement (residual 0.52), so this more moderate tone will likely be interpreted as dovish by many traders.
The Treasury market saw bonds rates of all durations fall immediately after the release, confirming that the statement was interpreted as more dovish. This suggests that the market was pricing in sustained hawkish policy from the Fed rather than just one hike today. If the FOMC statement had been in line with our projection, the SEP would almost certainly have pointed to four hikes in 2017, not three. Furthermore, Chair Yellen’s press conference today reinforced the fact that the rate path in the SEP today is almost identical to the one provided in December.
All three Fed communications today did not reflect a more hawkish long-term stance. This makes it clear that the last few weeks of increasingly hawkish rhetoric were part of a coordinated effort to prime the market for today’s rate hike, but not a prolonged hawkish shift in policy. Although Fed policymakers may have been overly hawkish in setting expectations for today’s decision, this is perhaps the clearest signal yet that the Fed will not move without the market first pricing in odds correctly.
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The Prattle Team
* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as the 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. Aggregate trend is the overall sentiment of the bank calculated using a LOESS fitting of trend using a 12-month window.
** 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 of 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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