Their alternative, patented in 2022, gathers FOMC statements, with a special emphasis on monetary policy statements, and assesses the degree of hawkishness/dovishness/neutrality of words and phrases they contain, tracking the sentiment trend over time. Given the increased focus recently on Federal Reserve communications and its use as a policy tool and driver of asset prices, the sentiment scores, which are published as an index on the Bloomberg terminal under the ticker “MNLPFEDS,” fills a particularly timely need. “The central bank's statements are being watched closely by markets globally,” says Jasper Lin, Executive Director, AlphaWise Quant Research. “Everybody's looking at them. The equity market, the bond market. They are very important pieces of communication. And this machine provides a consistent, systematic way of reading them, and to quantify and provide absolute scale of sentiment.”
The model could potentially be used to analyze communications from other major central banks, as well as to devise a trading strategy that drives alpha based on the model’s predictive value. It’s an approach that Zhang acknowledges is more difficult than the initial model based on Morgan Stanley Research, since FOMC statements come out less frequently than research reports, meaning there’s less data to crunch.
Nevertheless, a recent report found there was correlation between the Fed sentiment score and other financial metrics, and the model has shown to be a ~1 year leading indicator of monetary policy actions. According to a note issued by a team of Morgan Stanley researchers, the model exhibits a clear and substantial lead over monetary policy action, adding forecasting power to the level of interest rates, the shape of the yield curve and the direction of the U.S. dollar.
A Culture of Innovation
The success of the Fed sentiment model is nothing new to the people across the firm who have used the Patent Accelerator Program to bring their inventions to life. “Our Patent Accelerator is part of a broader, comprehensive framework that we have established to drive innovation in a structured way across the firm. It’s a concerted effort across business and technology to deliver high-quality, scalable solutions for our clients and business,” says Peter Akwaboah, Chief Operating Officer for Technology & Global Head of Innovation.
“We support our innovators through all stages of the process and make sure the experience runs smoothly,” says Bromberg. But just as important is how the Patent Accelerator Program encourages and acknowledges the employees behind those innovations. Says Bromberg, “We help our innovators receive the recognition they deserve both internally and externally. From a human point of view, there’s nothing better than that.
Summary: Current sentiment tools can be imprecise and clumsy. Morgan Stanley technologists have created a model that uses artificial intelligence (AI) and deep learning to interpret Fed sentiment, a model they were then able to patent with the help of our in-house Patent Accelerator Program.