The Federal Reserve no longer "spoils" the information, Wall Street creates "WarshGPT" to crack the Wash code.

Wall Street has begun using AI to analyze thousands of documents in an attempt to recapture policy signals.

Source: Jin Shi Data

After Kevin Warsh was appointed as the Chairman of the Federal Reserve in May, the communication style of the U.S. central bank has noticeably shifted. For Wall Street, this is not just a change in expression style, but also signifies that the traditional method of relying on public hints to deduce interest rate paths is becoming less effective.

Located a short drive from the Federal Reserve headquarters in Washington, D.C., F/m Investment Company feels a stronger "sense of distance," according to its CEO, Alexander Morris. He noted that the markets have long been adept at interpreting the jargon-filled speeches of Federal Reserve officials, but now, Warsh has made it clear that he intends to reduce such communication that the market can dissect.

Morris stated, "We have been quite successful relying on interpreting Federal Reserve speeches." Regarding the preferred expression style of past Federal Reserve leadership, he added, "And he (Warsh) just said he wants to remain silent on us."

In response to this change, F/m Investment Company launched "WarshGPT" last week. This is an AI-driven tool capable of analyzing nearly 1,800 documents and speeches by Warsh to help users understand his analytical approach to economic and monetary policy issues. The company manages exchange-traded funds linked to inflation and U.S. Treasuries.

F/m is not alone. As the Federal Reserve under Warsh reduces public forecasts, an increasing number of financial institutions are adjusting their research methods, directly utilizing AI models in some scenarios in an attempt to retain their judgment advantage regarding policy direction.

Gary Richardson, an economics professor at the University of California, Irvine, and a former Federal Reserve historian, stated, "Whether the Federal Reserve provides a lot of information or a little, investors need to understand the actions the Federal Reserve might take in the future. In situations with limited information, people will try every possible way to speculate on the Federal Reserve's thoughts."

The market pays particular attention to Warsh’s manner of expression, partly because he has clearly indicated his intention to reshape the Federal Reserve's forward guidance. One of the internal tasks that Warsh is advancing is to realign the Federal Reserve's operating methods, with communication mechanisms being one of the focal points.

According to CNBC analysis, the June Federal Reserve meeting statement was the first of its kind since Warsh took office, containing about 130 words, significantly fewer than the previous norm of over 300 words. Warsh himself acknowledged that this statement was "shorter," "more concise," and stated that he deliberately omitted forward guidance.

Statistics from UBS also show that in the news conference following Warsh's first rate decision as chair, only 5% of his statements related to policy content; in comparison, during the routine meetings under former Chair Jerome Powell, this ratio was 27%.

Investors and Federal Reserve observers have thus revisited experiences from the tenure of former Chair Alan Greenspan, attempting to find a reference. Richardson commented that the market jokingly claimed back then that just one phrase from Greenspan, such as "good evening," could trigger a market downturn.

During that period, financial media would also track the so-called "briefcase indicator." This notion suggests that if Greenspan appeared with a fuller briefcase, it meant he had more evidence supporting a change in borrowing costs.

AI tools and alternative signals begin to fill the gap

With a reduction in public statements and a compression of forward guidance, institutions are searching for new interpretive pathways. F/m Investment Company's WarshGPT is one such attempt.

This chatbot is built on Anthropic’s Claude model, and although its name mimics competitor OpenAI's ChatGPT, the actual development cost was less than $1,000. From initial concept to official release, it took about two weeks; prior to launch, the product was tested by a team consisting of senior Federal Reserve personnel and communications authors.

In addition to Warsh's own public speeches and documents, WarshGPT also accesses economic and political historical data to provide necessary background when responding. However, F/m has set clear boundaries on its functionality: the tool will not speak in Warsh's voice and will not generate forward-looking statements or policy predictions.

UBS is also adjusting its analytical tools. The bank provides clients with an interactive dashboard to track the tone of Federal Reserve policy. UBS strategist Elena Amoruso asserted that this tool can help users make an unbiased assessment of Warsh's comments during rate-setting meetings.

After Warsh chaired his first policy meeting last month, Amoruso told clients that Warsh's policy-related remarks were "generally hawkish." She noted that the Federal Reserve chair's stance is influenced not only by changes in inflation but also by his assessments of the labor market and economic growth.

Amoruso told CNBC, "This is arguably the most valuable dataset... in terms of how much money can be affected by a single word."

David Kelly, Chief Global Strategist at JP Morgan Asset Management, indicated that if the Federal Reserve stops releasing certain key materials in the future, his team is prepared with alternatives. For instance, if the Federal Reserve cancels the "dot plot," they will intensively study the public speeches of Federal Open Market Committee (FOMC) members to gauge how these policymakers responsible for setting rates might vote next.

However, Kelly also believes that if there is a significant adjustment to the Federal Reserve’s communication framework, it may take months from announcement to actual implementation, and the final plan may not be as radical as some market participants expect.

He said, "Just as the Federal Reserve states it can remain patient in adjusting rates to fit the economy, we can also remain patient in adjusting resource allocation."

Decrease in transparency means increased volatility and disagreement

For investors, one of the most direct consequences of the communication shrinkage may be that market volatility increases after policy meeting results or officials' public appearances. Some traders believe that such an environment might actually present a greater potential for returns.

Steve Friedman, a former New York Fed official and current senior macroeconomist at MacKay Shields, stated, "If communication about the reaction mechanism is reduced, I think that is actually negative for the economy. However, if you have a solid framework for economic and monetary policy analysis, then the path the Federal Reserve might take in taking action is not clear enough, which could actually become a source of excess return for investors."

In his view, if Warsh reduces the frequency of public speeches in the future, then the comments of Federal Reserve Governor Christopher Waller will become even more worth tracking. Friedman sees Waller as the "bellwether" for the entire committee.

Waller stated last week that the Federal Reserve should not focus on "fighting the last war" against inflation, but that interest rate hikes are still possible.

Richardson believes that this decrease in transparency is less friendly to ordinary investors. He remarked that retail investors may need to further diversify their portfolios in response to the increasing uncertainty of policies under Warsh; meanwhile, institutional investors trying to get ahead will invest heavily in hiring former Federal Reserve officials to help them make judgments in an information-scarce environment.

In terms of the policy trajectory for the next few months, the market expectations have already begun to diverge. The Chicago Mercantile Exchange's FedWatch tool shows that federal funds futures traders expect a nearly 59% probability of a rate hike in September; however, Kalshi traders bet that the most likely outcome of the September meeting is to keep rates unchanged.

Richardson commented, "For ordinary investors, figuring out what is happening has already become difficult. And it will become even more challenging in the future."