The statement is a diff, not a document
Central banks are aware that markets read their statements word by word. As a result, the text is drafted with continuity in mind. Most sentences carry over from the previous statement unchanged. The edits are deliberate and few, and each one is intended to convey something.
The most efficient way to read a statement, therefore, is side by side with the previous one. Several financial news services publish a marked-up comparison within minutes of release. Reading the comparison rather than the full text focuses attention on the changes, which is where the meaning sits.
Categories of change to look for
Changes tend to fall into a small number of categories. Descriptions of current conditions, such as whether growth is described as solid, moderate, or slowing. Descriptions of inflation, including whether progress is described as continuing or stalling. Forward guidance, which is the language about what the committee expects to do next. And risk balance, which is whether the statement describes risks as balanced, tilted towards weaker growth, or tilted towards persistent inflation.
A shift in any one category is informative. A shift in several at once, in the same direction, is more so. The September statement moved the description of labour market conditions from strong to moderating, and softened the forward guidance from anticipating further adjustment to assessing incoming data. Read together, the two edits indicate a committee less committed to a fixed path.
The press conference and the projections
The written statement is one of three documents. The press conference that follows often clarifies what the statement left ambiguous, and the periodic summary of economic projections shows where individual committee members expect rates to be over the coming years.
The dispersion of those projections is often more telling than the median. A wide spread indicates disagreement within the committee, which in turn suggests that future decisions are more contingent on data than on a settled plan.
Keeping the exercise disciplined
It is easy to over-interpret a single word. A useful discipline is to write down, before the release, what you expect the statement to say, then compare. Where the statement matched expectations, nothing has changed. Where it diverged, ask why. Over a series of meetings this builds a record of how the committee actually communicates, which is more reliable than any single reading.
None of this predicts the path of rates. It improves the quality of the questions being asked, which is the more realistic objective.
Key points
What to take from this note
- 01Read each statement side by side with its predecessor; the edits carry the meaning.
- 02Group changes into current conditions, inflation, forward guidance, and risk balance.
- 03Dispersion in committee projections often reveals more than the median.
- 04Write down expectations before the release to keep interpretation disciplined.
Goat Academy is an online financial education institution founded by economist and former investment banker Felix Prehn.
This article is general market commentary published for educational purposes. It is not financial, investment, or tax advice, is not a recommendation to buy or sell any security, and should not be relied upon as a basis for any investment decision. Trading and investing carry risk, including the loss of capital.