Using AI to assess the Fed: relaunching the EFG Hawkishness Indicator

Investment Insights • Macro

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Using AI to assess the Fed: relaunching the EFG Hawkishness Indicator

The US Federal Reserve (Fed) provides a window into its thinking about the state of the economy and the outlook for monetary policy through the release of meeting minutes. In this Macro Flash Note, Economist Sam Jochim provides an update on the perceived hawkishness of the Fed with the help of the updated EFG Hawkishness Indicator.

Sam Jochim

26 February 2026

Utilising AI

The EFG Hawkishness Indicator seeks to gauge policy bias at Federal Open Market Committee (FOMC) meetings. The latest update provides an innovation on the previous methodology which counted the number of times key words such as “elevated”, “robust”, “high” and “strong” were repeated in published meeting minutes.¹

It does so by utilising artificial intelligence (AI). Instead of searching for specific words, the entire minutes of FOMC meetings are assessed and scored on a scale, with a higher score representing a more hawkish policy bias. While the score itself is arbitrary and should not be overemphasised, the fact that the scoring system is internally consistent means that changes over time are worth looking at more closely.

To investigate further, we analysed the minutes of each Fed meeting over the last ten years and compared the EFG Hawkishness Indicator score to the Fed’s preferred inflation measure, core personal consumption expenditure (PCE) inflation, and the Fed funds rate over time. The results are shown in the chart below.

What does the Hawkishness Indicator tell us?

It is notable that the correlation between the EFG Hawkishness Indicator and core PCE inflation is 71.4%. This suggests that the Fed is more likely to adopt a hawkish rhetoric when inflation is rising and a dovish rhetoric when it is falling. The indicator also has a 71.1% correlation with the Fed funds rate, suggesting the Fed is effective at communicating through meeting minutes to offer an insight into policy bias within the FOMC.

There is also an interesting timing question related to the association between the EFG Hawkishness Indicator and the Fed funds rate. For example, at the start of 2016, the indicator began rising before the Fed started raising interest rates. The same pattern can be observed in the years after Covid.

To investigate this further, the correlations between the Fed funds rate and lagged EFG Hawkishness Indicator scores are compared. The indicator is lagged by up to eight meetings since this is how many FOMC meetings there are in a year. The results are shown in the table below.

Table 1. EFG Hawkishness Indicator’s correlation with federal funds rate

Source: Federal Reserve, LSEG Data & Analytics, ChatGPT and EFG calculations. Data as at 23 February 2026.

The correlation rises to around 90% when the EFG Hawkishness Indicator lags the Fed funds rate by three to four meetings, which equates to around four to six months. This implies that the Fed adopts a more hawkish or dovish rhetoric months before it begins raising or cutting interest rates. Such a result makes sense given central banks do not seek to shock market participants with their policy decisions.

Recent signals from the indicator

To that end, the increase in the Hawkishness Indicator (shown in Chart 1) that occurred at the FOMC meeting in January was notable. The Fed appears to be nearing the end of its rate cutting cycle, a point highlighted in EFG’s Outlook 2026.² Indeed, markets expect between two and three more rate cuts in 2026 and for the Fed to be on hold thereafter.

Furthermore, January’s FOMC meeting minutes noted that “several participants indicated that they would have supported a two-sided description of the Committee’s future interest rate decisions”. This reflects the fact that inflation has not yet fallen to the Fed’s 2% target and labour market conditions have stabilised. Given this, it will be interesting to see how the EFG Hawkishness Indicator evolves at future FOMC meetings.

In summary, the EFG Hawkishness Indicator adopts a new methodology, utilising AI to help assess the hawkishness of central banks. For the Fed, it shows a more hawkish rhetoric was adopted in January, reflecting the fact that inflation is sticky and has not yet fallen to the Fed’s 2% target. How the Indicator changes at future meetings will provide a signal as to the future path of US federal funds rates in 2026.

¹ See previous Macro Flash Note, ‘EFGAM Hawkishness Indicator’
² https://www.efginternational.com/uk/insights/outlook-2026/2026/2-trough-interest-rates-in-advanced-economies-opportunities-in-emerging-markets.html

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Using AI to assess the Fed: relaunching the EFG Hawkishness Indicator

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