Federal Reserve Officials’ concerns about the overheated labor market may be over. The focus now is on prices. Recent data on inflation suggests that the monetary policy effect on shelter prices is lagging, and Federal Reserve Officials are waiting to see future data. On July 10th, Federal Reserve Chair Jerome Powell stated before the US Senate (Committee on Banking, Housing, and Urban Affairs) in Washington that more good data would strengthen confidence in inflation moving toward the targeted 2%. Powell’s statement before the US Congress comprised a twofold message. First, the Federal Reserve bankers believe the Job Market has cooled down. Second, there are still a couple of items on the price side that still need more review.

The timing and “causality” effect of monetary restrictions explain much of the current narrative among central bankers today. In Powell’s words,

“The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.” (Full Statement here)

To confirm our understanding of the current stance, we run a comparison of Powell’s speeches, which shows he focused this time on labor markets. The descriptive analysis of the text supports the Bank’s stance on keeping federal funds rates at 5-1/4 to 5-1/2 for a longer period than many economists would prefer. Likewise, the statement shows the bank may check soon concerns regarding overheating employment levels. Thus, it seems the job check list leaves only Shelter and a couple of other items for the rates to start changing down.

The speech comparison was run on ninety-four Powell speeches, thereby training a Latent Dirichlet Allocation Topic Model. We held out Powell’s latest statement to Congress and ran the model to classify it. The model shows that the statement focuses largely on monetary policy, as expected, while also emphasizing labor markets. The chart below shows the topics on which Powell often speaks, while ranking the topics mentioned in the statement.

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