JPMorgan Creates AI Model to Analyze 25 Years of Fed Speeches

(Bloomberg) — A week before the Federal Reserve’s next meeting, JPMorgan Chase & Co. unveiled an artificial intelligence-powered model that aims to decipher the central bank’s messaging and uncover potential trading signals.

Most Read from Bloomberg

Based off of Fed statements and central-banker speeches going back 25 years, the firm’s economists including Joseph Lupton employed a ChatGPT-based language model to detect the tenor of policy signals, effectively rating them on a scale from easy to restrictive in what JPMorgan is calling the Hawk-Dove Score.

Plotting the index against a range of asset performances, the economists found that the AI tool can be useful in potentially predicting changes in policy — and give off tradeable signals. For instance, they discovered that when the model shows a rise in hawkishness among Fed speakers between meetings, the next policy statement has gotten more hawkish and yields on one-year government bonds advanced.

“Preliminary applications are encouraging,” Lupton and his colleagues wrote in a note accompanying the debut.

The tool is another push in Wall Street’s never-ending search for a trading edge and one of the earliest adoptions of the technology developed by OpenAI. Earlier this month, a couple of research papers showed that ChatGPT can add value in market-relevant tasks, such as deciphering whether Fed statements were hawkish or dovish, or determining whether headlines were good or bad for a stock.

Based on the JPMorgan model, while the reading for Fed statements has fluctuated in recent months and that for speeches has trended lower, both still hover near the highest levels in two decades, a clear sign of persistent hawkishness.

Story continues

Read more: ChatGPT Can Decode Fed Speak, Predict Stock Moves From Headlines

The Fed is expected to raise its benchmark interest rate next week by another 25 basis points to 5.25%, according to the median forecast by economists in a Bloomberg survey.

Investors have been laser-focused on the Fed’s policy path after its aggressive tightening campaign to battle inflation drove stocks and bonds into rare, concerted selloffs last year. While asset prices have since recovered, bond traders have kept betting on rate cuts later this year, defying Fed Chair Jerome Powell’s warnings that rate reductions in 2023 aren’t on his mind.

Going by JPMorgan’s model, a 10-point increase in the Fed Hawk-Dove Score now translates to roughly an increase of 10 percentage points in the probability of a 25 basis point hike at the central bank’s next policy meeting, or vice versa.

The Hawk-Dove Score, also available for the European Central Bank and the Bank of England, is expected to expand to more than 30 central banks around the world in the coming months.

–With assistance from Sam Potter.

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.