Breaking Down the FOMC Press Release: Market Volatility Follows an Inc

the fed

What was the tone of today’s FOMC press release[1]? When can rate changes be expected? How’s the market reacting? Leveraging automated sentiment analysis, we’ll place today’s release within the context of recent Fed communications to generate a clear picture of what the central bank is thinking–and what the market can expect.

At Prattle we use proprietary language processing software to score central bank communications. These scores, which represent a comprehensive, unbiased evaluation of the language in Fed dispatches, range from -2 to 2 based on the hawkishness (positive) or dovishness (negative) of those communications. The press release, which we scored at -0.404, represents a break from recent trends in the Fed’s mood.

The graph below sets the individual meeting score (the green dot) alongside the general trend in press release scores (the green line), the trend in Board of Governors speeches (the red line) and the speeches of the Regional Bank Presidents.

July FOMC Press Release

While the latest FOMC Press Release does carry a somewhat dovish tone, it is notably less dovish than other recent press releases. This is clearly seen in late July’s Press Release trend line, which dives into significantly dovish territory. In this context, the score of the latest Press Release demonstrates a shift towards an increasingly hawkish tone–more in line with the hawkish communications of the Board of Governors and Region Bank Presidents of recent months.

This suggests that the full committee is edging more hawkish–though still not quite in line with the sentiment of individual members. While December may be slightly more likely, a September rate increase is certainly possible.

As the graph below clearly demonstrates, the release had an immediate effect on equity market volatility:


The blue trend line represent the performance of the S&P 500, and, in the window of time surrounding the Press Release (the grey band), a dramatic increase in market volatility is seen. In fact, between 2 pm Eastern (when the communication was “officially” released) and 2:02 pm the S&P jumped 5.54 points then fell 8.98 points–a remarkable level of market movement that begs investigation. Even though market volatility is common on FOMC Meeting days, today’s grand swings are certainly noteworthy.

We’ll address this volatility spike in greater detail in a forthcoming post, but, if nothing else, it’s clear the equities market has its ear to Fed communications.

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