Another FOMC decision is upon us. Expectations are for a 25 bps cut. Equity markets are near all-time highs and US economic data continues to be resilient. A communications embargo has limited public FOMC communications. NLP analysis of available FOMC communications suggests a much lower likelihood of a rate cut than markets expect. Economic data also implies that a data-driven FOMC would hold rates steady. Be prepared for a surprise on Wednesday. Full code for each of the three models below is on my GitHub.
NLP Analysis of FOMC Statements
Public communications are unavailable for FOMC board members Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Charles L. Evans, and Randal K. Quarles. Of note, these members voted for a rate cut in July.
Where communication is available, my NLP model paints a mixed picture:
|Statement||Probability of Rate Cut|
|Jerome Powell speech at Jackson Hole (8/23/19)||22.2%|
|John C. Williams speech in New York (9/4/19)||30.6%|
|James Bullard interview on CNBC (8/23/19)||8.9%|
|Esther L. George interview on CNBC (8/22/19)||10.4%|
|Eric Rosengren speech at Stonehill College (9/3/19)||18.6%|
Economic Data Supports Holding Rates Steady
Updated through August, my core market model (which contains 164 data series going back to 1992) once again suggests that a data-driven Fed would not cut rates. I had used an earlier iteration of this model to analyze the July FOMC decision. At the time, it predicted no rate cut, contradicting my NLP analysis, and the ultimate outcome.
|Model||Model Accuracy||Probability of Rate Cut|
|Core Market Model |
The President is Clearly Concerned He Won’t Get a Rate Cut
The President has ramped up his focus on the Fed since the July 31 decision. His team is no doubt aware of the strength in equity markets and in core economic data. Nonetheless, the administration likely believes that a rate cut would allow the President’s to remain resolute in trade negotiations with China and support asset prices leading into the 2020 election.
|Item||45 Days Prior to July 31||45 Days Prior to Sep 15|
|# of Tweets on Fed||18||39|
This week is no different, with the President releasing a pair of tweets this morning, post the weekend oil field attacks in Saudi Arabia.
Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.