Fed Transparency and Policy Expectation Errors: A Text Analysis Approach Eric Fischer | Rebecca McCaughrin | Saketh Prazad | Mark Vandergon NO. 1081 NOVEMBER 2023 Fed Transparency and Policy Expectation Errors: A Text Analysis Approach Eric Fischer, Rebecca McCaughrin, Saketh Prazad, and Mark Vandergon Federal Reserve Bank of New York Staff Reports, no. 1081 November 2023 https://doi.org/10.59576/sr.1081 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. JEL classification: E43, E52, E58, C80 Keywords: interest rates, monetary policy, central bank and policy, sentiment analysis _________________ Fischer, McCaughrin: Markets Group, Federal Reserve Bank of New York (email: eric.fischer@ny.frb.org, mccaughrin@ny.frb.org). Prazad: Research Analyst, Research Group, Federal Reserve Bank of New York (email: saketh.prazad@ny.frb.org). Vandergon: Technology Group, Federal Reserve Bank of New York (email: mark.vandergon@ny.frb.org). The authors thank Michael Bauer, Ryan Bush, Richard Crump, Matthew Gentzkow, Seung Lee, Eric Offner, Chiara Scotti, Adam Shapiro, Derek Tang, and seminar participants at the Federal Reserve Bank of New York, the Federal Reserve Board, the Federal Reserve Bank of Atlanta Quantitative Skills Conference, and the Western Economic Association International Conference for helpful comments. They also thank Federal Reserve Bank of New York Markets Group analysts for assistance with sentence annotation and Thierno Diallo for excellent research assistance. This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s). T...
