Fed Transparency and Policy Expectation Errors: A Text Analysis Approach

Eric Fischer, Rebecca McCaughrin, Saketh Prazad () and Mark Vandergon
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Saketh Prazad: https://www.hbs.edu/faculty/Pages/profile.aspx?facId=1543396

No 1081, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper seeks to estimate the extent to which market-implied policy expectations could be improved with further information disclosure from the FOMC. Using text analysis methods based on large language models, we show that if FOMC meeting materials with five-year lagged release dates—like meeting transcripts and Tealbooks—were accessible to the public in real time, market policy expectations could substantially improve forecasting accuracy. Most of this improvement occurs during easing cycles. For instance, at the six-month forecasting horizon, the market could have predicted as much as 125 basis points of additional easing during the 2001 and 2008 recessions, equivalent to a 40-50 percent reduction in mean squared error. This potential forecasting improvement appears to be related to incomplete information about the Fed’s reaction function, particularly with respect to financial stability concerns in 2008. In contrast, having enhanced access to meeting materials would not have improved the market’s policy rate forecasting during tightening cycles.

Keywords: interest rates; monetary policy; central banks and their policies; sentiment analysis (search for similar items in EconPapers)
JEL-codes: C80 E43 E52 E58 (search for similar items in EconPapers)
Pages: 47
Date: 2023-11-01
New Economics Papers: this item is included in nep-ban, nep-big, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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DOI: 10.59576/sr.1081

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