Steady policy for now

Textual analysis of the latest Beige Book suggests sentiment from around the Fed districts remains modestly optimistic about growth, with a decline in concern about inflation, but certainly no ‘all clear’. There is nothing in the Beige Book to suggest the forthcoming FOMC will be keen to pronounce rate cuts in the near future – though we note the Beige Book is just one input into the FOMC discussion.

Source: creator.nightcafe.studio

The overall Sentiment Index is calculated by scoring text against the ‘Bing’ lexicon – details available here – to indicate overall sentiment (positive or negative) within that text. The power of this analysis comes from the ability to compare current documents with past documents. The basic manner of English expression doesn’t change so the analysis can provide a consistent measure of changing sentiment. The historic analysis of Fed’s Beige Book closely reflects the evolving US economic environment for the 16 years of data we have at hand. Here is the current Sentiment Index.

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Overall the Beige Book suggests continued, but modest, economic growth.

A second measure splits out positive sentiment from negative sentiment. This suggests the continued (modest) optimism is supported by a decline in negative sentiment, rather than a pickup in positive sentiment. However, it is fair to say that there has been no convincing sentiment either way for over 2 years.

Next we split out specific meantion of ‘inflation’ in the document and compare it to policy rate history (using Fed Funds effective rate). The inflation alarm in March 2022 stands out and conincided with the beginning of the current rate cycle. Current inflation focus suggests the Fed districts are sanguine, though not completely convinced that inflation has been beaten. We suggest a score below 2 signals a need for policy action by the Fed. The score is currently 1.6, suggesting no imperative to raise rates, but not much incentive to cut yet either.

Finally, a measure of discussion of employment related terms suggests some anxiety remains about the employment picture, which remains well above the levels seen 2011-2018.

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