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.
Jackson Hole was front and center this week, and Yellen’s speech took up the majority of that spotlight. Although she focused on the evolution of the Fed’s monetary policy toolkit, the FOMC Chair did leave space for economic conditions in her optimistic analysis:
Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.
In fact, Yellen’s entire speech scored slightly hawkish* according to Prattle’s algorithm, earning a residual score of 0.38**. Yellen’s tone is in line with recent communications from SF Fed President Williams (residual 0.49), NY Fed President Dudley (residual 1.75), and Vice Chair Fischer (residual 0.45), and a September hike is not entirely out of the question.
The bottom line: the Fed’s key players are trending hawkish, leaving the door is open for a hike in September…and virtually assuring one before year-end.
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.