The Federal Reserve has grown more dovish in the run-up to this week’s interest-rate policy meeting, suggesting a hands-off policy on interest rates perhaps until June, according to a textual analysis of U.S. central bank communication by the data firm Prattle.
Prattle, started by a led by former Brown University economics professor Evan Schnidman, analyzes Fed speeches for clients using proprietary software that gives each Fed communication a score. The higher the score, the more hawkish it is.
Since the Fed met in mid-December, Prattle analyzed 14 speeches. The quantitative data show Fed communication has fallen ahead of this week’s meeting, Schnidman said in an interview, signaling a more dovish central bank.
Markets paid close attention to two speeches given earlier in January by Fed Chairwoman Yellen, one looking at the goals of monetary policy and the second looking at the economic outlook.
Yellen’s first speech dealt with the central bank’s strategy over the past few years and scored hawkish, according to Prattle’s analysis. But the next day’s speech, seen as more important as a signal for the future path of interest rates because it discussed the economic outlook, was dovish.
In addition to Yellen, several other Fed speakers were less hawkish than they had been in prior speeches, he added.
Based on an analysis of the data, Schnidman predicted the Fed’s policy statement this week might be less hawkish than December.
Schnidman said the Fed would have to “reverse course very quickly” if it wanted to prepare markets for a March rate increase.
Fed officials have penciled in three rate hikes this year. The market expects two moves, in June and December.
Sell the data, not the forecasts on the data
Schnidman said the idea for Prattle had its genesis while he was a graduate student at Harvard. There he studied Fed communication during the financial crisis using automated analysis.
That was a critical period, when the Fed moved away from the cryptic communication of Alan Greenspan to the press conferences of Ben Bernanke.
“The Fed has never been more verbose, never been more transparent,” Schnidman wrote in a book “How the Fed moves Markets” based on his thesis.
“Put plainly, the Fed’s words move markets and have, therefore become a vital source of economic influence for the institution,” he said.
Some on Wall Street — and now, even Bernanke himself — have even started to complain about too many speeches.
Schnidman saw that he might be able to cut through the clutter and sell forecasts based on the text analysis to investment firms.
Prattle now follows the communication of 20 central banks for its clients.
One big success for the company came in September 2015, when the Fed held interest rates steady even though many in the market were calling for a rate hike.
“We saw the actual trend was rising [getting more hawkish] but it could have to go up very, very fast” to signal a move, Schnidman said.
“As early as June, we said we don’t think they are going to hike in September.”
Another feather in their cap, he said, was a prediction that the Bank of England would not cut rates in the wake of last summer’s Brexit vote.
Prattle’s data is even being used by researchers at the San Francisco Fed to examine how communication moves financial markets.
Prattle’s success hasn’t gone unnoticed. The firm announced last week it has received $3.3 million in financing from a group led by GCM Grosvenor.
Schnidman said the company will use the funding to develop software to cover the communication of public companies.