Markets across the world are intensely focused on the Federal Reserve’s policies, often considering the Fed's actions and statements as critical indicators. The premise is straightforward: if the Fed adopts a dovish stance despite poor economic data, it's seen as a "bad news is good news" situation for risky assets. This implies that disappointing economic outcomes might benefit these assets, as they signal a potential for rate cuts by the Fed, boosting risk appetite. Conversely, if inflation rates are high but the Fed indicates a downward trend soon, markets typically react favorably. 

A recent Bloomberg article discussed using natural language processing (NLP) technology to develop a Fedspeak Model. This model assesses if the Fed commentary is hawkish (suggesting rake hikes) or dovish (indicating rate cuts). Traders found that mapping this model against other market indicators reveals a significant correlation. For example, Figure 1 compares the Fedspeak Model (blue) with the Citi Economic Surprise Index (white) and 2-year yields (orange), demonstrating a close alignment until 2024.  As early 2024 economic data proved strong, bond markets reacted with higher yields. However, the Fed’s dovish commentary kept markets stable. 

Figure 1: Citi Economic Surprise Index vs. US 2-year Treasury Yields & Bloomberg Fedspeak Model 

Source: Bloomberg 

Looking at Figure 2, that same Fedspeak model’s direction is inverted (blue) and compared to Bitcoin’s price movements over past 2 years (white) a clear pattern emerges. Hawkish Fed signals in 2022 correlated with a decline in Bitcoin’s value, whereas a predominantly dovish stance throughout 2023 has supported Bitcoin's rally. Institutional investors, viewing Bitcoin as a long-duration asset due to its scarce cash flows, are likely to see continued dovishness on rates as a positive signal for Bitcoin's value. Essentially, the Fedspeak Model could be hinting at an opportune moment to invest in Bitcoin. 

Figure 2: Bloomberg Fedspeak Model vs. Bitcoin/US Dollar cross-rate 

Source: Bloomberg 

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