Sentiment analysis of Fed press-conferences: tracking hawkish and dovish trends in monetary policy.
Using the Advance Macro FOMC Hawk/Dove Index as a framework, the article analyses the Fed's communication tone during press conferences. The historical analysis highlights significant shifts in tone, particularly during important events like the COVID-19 pandemic and the Ukraine invasion.
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Media and news outlets regularly update the public about the Federal Reserve's latest monetary policy decisions. The main focus of these articles is undoubtedly the Fed's move, e.g. whether it decided to change or hold the current federal funds rate target. However, beyond scrutinizing the actual monetary policy decision, the tone of press conferences has become increasingly important. More precisely, it is often not about the monetary policy decision itself but about the so-called forward guidance element of the Fed's speech and whether this signals a hawkish, dovish, or neutral future monetary policy stance.
The Advance Macro FOMC Hawk/Dove Sentiment Score Index (FOMC press-conferences).
The Advance Macro FOMC Hawk/Dove Sentiment Score Index is a measure that quantifies the sentiment expressed in Federal Open Market Committee (FOMC) press conferences. The sentiment is classified into three categories: hawkish, neutral, or dovish. The classification process involves an algorithm trained on a pre-defined dataset, which labels each sentence in the press-conference transcripts according to its sentiment.
To compute the sentiment scores for each press conference, the algorithm processes the transcripts and assigns sentiment labels to each sentence. The net count of hawkish versus dovish sentences is then aggregated to derive two separate scores: one for the introductory statement and another for the reporters' question-and-answer (Q&A) session.
These scores are bounded between -1 and +1:
- A score of +1 represents the highest hawkish sentiment, indicating a strong inclination towards policies that would tighten monetary policy.
- A score of -1 represents the most dovish sentiment, indicating a strong inclination towards policies that would ease monetary policy.
This scoring system allows analysts and market participants to gauge the overall sentiment of the FOMC's communications and its potential implications for monetary policy.
Differentiating between the introductory statement and the Q&A session tone of the press-conference.
The tone of the two main segments of FOMC press conferences—namely, the introductory statement and the Q&A session—can generally be positively correlated. However, there are instances where this correlation does not hold true. Notably, during the COVID-19 pandemic, Narain and Sangani observed that market movements during the press conferences often went in the opposite direction to the movements following the publication of the FOMC statement. Text analysis indicates that these divergent reactions are influenced by Chair Powell’s communication style, particularly his tendency to shift towards more dovish or hawkish language during the Q&A segment.
Typically, the Chair reiterates the content of the previously published press-release statement (released about 30 minutes before the press conference) during the introductory statement, which is usually delivered within the first 10 minutes of the press conference. Consequently, the tone of this initial address can differ from the tone reflected in the answers given to reporters during the Q&A session. Because of this potential divergence, constructing a single sentiment score for the entire press conference might be inappropriate, as it could confound two distinct tones.
To address this, the sentiment scores for the introductory statement and the Q&A session are calculated separately. This approach helps to accurately capture the different sentiments that may be expressed in each segment, providing a clearer picture of the overall communication from the FOMC. For instance, as seen in the example from the FOMC July 2022 meeting (illustrated in Figure 1), the sentiment scores for the statement and the Q&A session moved in opposite directions, highlighting the importance of evaluating these segments independently.
Historical movements in the Advance Macro FOMC Hawk/Dove Sentiment Score index.
Regularly monitoring the hawkish/dovish sentiment of FOMC press conferences can be informative, as the Chairman often provides key insights into the economic outlook and can even pre-commit to future monetary policy actions, especially when interest rates are at historically low levels. By tracking developments in these sentiment scores, one can better anticipate upcoming shifts in monetary policy.
For example, following the COVID-19 pandemic, there was a noticeable and consistent increase in hawkish language within the sentiment index, reaching an all-time high after the Ukraine invasion. This shift signalled to the public that the Fed was concerned about rising inflationary pressures. The more hawkish tone eventually translated into more restrictive monetary policy actions, as indicated in Figure 1. This episode underscores the importance of closely monitoring the sentiment expressed in FOMC communications when trying to predict future policy moves.
Latest developments in the index.
Since reaching high levels in mid-2022, the Hawk/Dove Index scores have slowly started normalizing, gradually reducing over time. This shift may be attributable to a more dovish sentiment or a less hawkish stance compared to previous meetings. However, despite entering "dovish territory" several times (as evidenced by the Q&A score associated with the FOMC meeting in January 2024, see Figure 1), the scores have never maintained a sustained streak of dovish signals.
This pattern is primarily driven by the fact that while inflation has decreased from its mid-2022 peak, the disinflation process has been bumpier and slower than anticipated (see Figure 2). Essentially, the Fed has not observed clear and unambiguous evidence of a steady disinflationary path toward the 2% target, which has led to a cautious approach and a reluctance to consistently use dovish language.
Lately, at the June 2024 FOMC meeting, the AM Hawk/Dove Scores have risen again, possibly indicating a more hawkish and restrictive monetary policy stance (see circled observations in Figure 1). Clearly, inflation dynamics are proving more persistent than expected, and with the labor market still hot, this might delay the Fed's plans to cut interest rates. This renewed hawkish sentiment suggests that the Fed remains vigilant about inflation and is prepared to maintain or even tighten monetary policy if necessary to achieve its inflation targets.
Conclusion
The Advance Macro FOMC Hawk/Dove Sentiment Score Index provides valuable insights into the Federal Reserve's monetary policy stance by analysing the tone of FOMC press conferences. Recent trends indicate a normalization towards a less hawkish sentiment post-pandemic. However, these trends have experienced complete reversals, reflecting a cautious and data-dependent approach in the Fed's communication. The continued vigilance of the Fed, as indicated by the Hawk/Dove Sentiment Score Index, underscores the importance of closely monitoring these scores to stay ahead of potential shifts in monetary policy.
The Advance Macro FOMC Hawk/Dove Score Indexes are part of our Central Bank E-monitor subscription offering. Subscribe today to gain valuable insights into FOMC communication.
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Disclaimer: The information contained in this article is for informational purposes only and should not be construed as investment advice, financial guidance, or a recommendation to buy or sell any financial instruments. This article does not take into account any specific investment objectives, financial situation, or particular needs of any individual. Before making any investment decisions, you should seek advice from a qualified financial advisor who can take into account your individual circumstances. The authors and publishers of this material expressly disclaim any liability for any loss arising from any reliance on the information provided herein.