Wall Street adapts to new era of Federal Reserve communications

F/m Investments’ Washington, D.C., office is just a short drive from the Federal Reserve‘s headquarters. But under the central bank’s new leadership, CEO Alexander Morris has found the distance feeling far greater.

Fed Chairman Kevin Warsh embarked on an overhaul of the central bank’s forward-looking communication since taking the post in May. That move sounded the alarm for market participants like Morris, whose investing theses rely in part on predicting what the Fed will do with interest rates.

“We’ve made a pretty good business out of decoding Fedspeak,” said Morris, referring to the jargon-heavy communication preferred by central bank leaders. “And he just said he was going to go quiet on us.”

This week, Morris’ firm, which manages exchange-traded funds tied to inflation and U.S. Treasurys, released “WarshGPT.” It’s an artificial intelligence-powered tool that parses nearly 1,800 documents and transcripts from Warsh, with the goal of helping users understand how he may analyze issues related to the economy or monetary policy.

F/m Investments is one of many financial institutions readying for an era with less public forecasting from Warsh’s Fed. In some cases, they’re turning to AI models to gain an edge in investing.

“Whether the Fed is providing a lot of information or a little information, investors have to understand what the Fed is likely to do in the future,” said Gary Richardson, a former historian at the central bank who’s now a University of California, Irvine, economics professor. “With limited information, people are going to try to do anything they can to figure out what the Fed is thinking.”

Investors and Fed watchers have wondered if former Chairman Alan Greenspan‘s communication style can serve as a baseline for what to expect under Warsh.

In that era, Richardson said people joked that Greenspan simply saying “good evening” could cause a market decline. Financial media tracked a so-called briefcase indicator, which operated on the theory that Greenspan carrying a bulkier bag meant he accumulated evidence for why borrowing costs should be altered. 

Already, Warsh has made expectations clear for a shift in how the Fed publicizes information. One of his task forces aimed at reshaping the Fed’s operations is focused on how the central bank communicates.

June’s Federal Reserve meeting statement — the first such release under Warsh — contained around 130 words, down from figures above 300 words seen in prior publications, a CNBC analysis found. Warsh, who acknowledged the statement was “shorter” and “simpler,” said it purposefully excluded forward guidance.

In his first post-decision press conference as chairman, Warsh allocated 5% of sentences to policy-relevant topics,…