Data-Driven Fed Watching: Comprehensive, Unbiased, and Quantitative

Abstract

The days of an unknowable Fed are over. Advisors, financiers, and financial professionals of all levels no longer need to speculate about the width of a briefcase or spend valuable hours teasing apart elusive—or perhaps nonexistent—kernels of policy embedded in Fedspeak. The Fed has embraced transparency, and the financial world is better for it. But, the abundance of central banking data now available to financial professionals does not do much good unless accompanied by effective analysis. Current Fed watching certainly supplies abundant analysis—and has even created a rigorous approach to press release interpretation—but the overall effectiveness of this methodology is questionable in a world where central banks use multiple important lines of cornmunication. Even at their best, modern methods provide projections based on qualitative opinions—not quantitative data—when identifying the Fed’s current policy position. Current Fed watching techniques simply do not provide the strongest analysis of the Fed’s outlook and future policy for financial professionals. If an accurate assessment of central bank communication is important to understanding the market—and it undoubtedly is—analysts ought to stop treating central bank communications like poetry when attempting to zero in on policy: “close reading” may be great for unlocking Shakespeare’s sonnets, but it’s not the best method of understanding essential, market-moving data.