Ecoinometrics - The Fed Speaks: FOMC minutes

What we can learn from a text analysis of the FOMC minutes.

Bad news for those who anticipate a pivot from the Federal Reserve any time soon. 

Both the message out of the FOMC and the most recent data suggest we are already on the path of tighter for longer.

That’s exactly what you need to make sure a recession is unavoidable.

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The Fed Speaks: FOMC minutes

We now have the minutes of the FOMC February meeting and honestly the message is pretty consistent with what we picked up from Jay Powell press conference a few weeks ago.

But before we look at the data let me remind you why we do that.

The Federal Reserve is expected to guide the US economy towards prosperity by keeping unemployment low, having inflation under control and maintaining smooth financial market operations. The catch is to do that they have only three tools:

• Setting the Fed Funds rate, which gives them control over short term rates.

• Playing with the money supply, by adding or removing bonds (essentially) from their balance sheet.

• Talk about the previous two things they can do.

And of course of these three powers the easiest to use is the third one. A well formed and consistent message of what the Federal Reserve wants to achieve and how they plan to do it is the cleanest way they have to get market participants do the work for them.

Two of the main communications coming out of the Federal Reserve are the press conference following each FOMC meeting and the minutes of the meeting itself.

The Fed knows the impact of what they are going to say so you can bet every word is carefully chosen.

Now there are two approaches to get extract information from those communications:

• You just read it as a whole and see what message sticks for you. That will give you the main message that’s likely to give you the main message they are trying to convey.

• You run some text analysis to fish for some quantitative patterns. That will surface on top of the main theme some more subtle information that can be missed with a simple high level reading. 

So what we are doing here is taking the texts of the FOMC minutes and extracting some statistics from those that can help us infer what the Federal Reserve wants market participants to think.

Big surprise, when we do that on the latest FOMC meeting minutes there is absolutely no sign we are heading for a pivot. If anything we are getting some confirmation that more tightening is in the cards.

Exhibit A: inflation yes, recession no