Authors: Eric Fischer, Rebecca McCaughrin, Saketh Prazad, and Mark Vandergon
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Staff Reports
Fed Transparency and Policy Expectation Errors: A Text Analysis Approach
Number 1081
November 2023
November 2023
JEL classification: E43, E52, E58, C80
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.
Author Disclosure Statement(s)
Eric Fischer (Markets Group, Federal Reserve Bank of New York)
I have no relevant or material financial interests that relate to the research described in this paper “Fed Transparency and Policy Expectation Errors: A Text Analysis Approach”. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Rebecca McCaughrin (Markets Group, Federal Reserve Bank of New York)
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Saketh Prazad (Research Analyst, Research Group, Federal Reserve Bank of New York)
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Mark Vandergon (Technology Group, Federal Reserve Bank of New York)
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
I have no relevant or material financial interests that relate to the research described in this paper “Fed Transparency and Policy Expectation Errors: A Text Analysis Approach”. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Rebecca McCaughrin (Markets Group, Federal Reserve Bank of New York)
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Saketh Prazad (Research Analyst, Research Group, Federal Reserve Bank of New York)
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Mark Vandergon (Technology Group, Federal Reserve Bank of New York)
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Fischer, Eric, Rebecca McCaughrin, Saketh Prazad, and Mark Vandergon. 2023. “Fed Transparency and Policy Expectation Errors: A Text Analysis Approach.” Federal Reserve Bank of New York Staff Reports, no. 1081, November. https://doi.org/10.59576/sr.1081
Fischer, Eric, Rebecca McCaughrin, Saketh Prazad, and Mark Vandergon. 2023. “Fed Transparency and Policy Expectation Errors: A Text Analysis Approach.” Federal Reserve Bank of New York Staff Reports, no. 1081, November. https://doi.org/10.59576/sr.1081
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