Press conferences predict future Fed policy, study finds
A new Federal Reserve Board paper uses large language models to quantify central bank communication, demonstrating that press conferences correlate more strongly with future policy than FOMC statements. This fine-tuning helps market participants revise their expectations.
Beyond coarse statements
The paper, authored by Ryan Byun, Bennett Fees, Margaret M. Jacobson, and Todd B. Walker, highlights the distinct roles of FOMC statements and press conferences.
While statements provide a coarse signal of the current policy stance, press conferences offer a more nuanced message that better predicts future policy rates.
This finding helps explain instances where market reactions to press conferences have contradicted those to preceding FOMC statements, particularly during the 2022 tightening cycle.
The authors utilize a BERT large language model, fine-tuned to Fed communication, to analyze sentiment scores, revealing that press conferences contain more varied content, including 'dovish' elements even in overall 'hawkish' periods, which influences market expectations about the future federal funds rate.
Evolving communication tools
The study formalizes the role of press conferences in refining the Fed's message, noting that markets began perceiving additional signal from them around 2015, several years after their introduction in 2011.
By 2019, when Chair Powell implemented press conferences after every meeting, they were found to contain more signal than FOMC statements.
This suggests that new communication tools require time to be fully understood and integrated by market participants.
In contrast, speeches by the Federal Reserve Chair, while communicating narratives, do not, on average, exhibit as strong a relationship with market reactions, indicating a noisier signal compared to press conferences.
A real-time policy window
This research provides a crucial real-time window into the Federal Reserve's deliberative content, which traditionally only becomes public with a five-year lag through transcripts.
By demonstrating the predictive power of press conferences, the paper offers valuable insights for constructing high-frequency monetary policy shocks.
The findings suggest that including press conferences, especially when augmented with longer-term rates, can stabilize estimates of monetary policy transmission.
This underscores the evolving landscape of central bank communication and its profound impact on financial markets.