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How You Say It Matters: Text Analysis of FOMC Statements Using Natural Language Processing

Author

Listed:
  • Taeyoung Doh
  • Sungil Kim
  • Shu-Kuei X. Yang

Abstract

The Federal Reserve has increasingly used public statements to shape expectations about future policy actions. After the Great Recession, when the nominal short-term interest rate reached its effective lower bound, the Federal Open Market Committee turned toward explicit forward guidance about the future path of the policy rate as well as the amount and composition of large-scale asset purchases in their post-meeting statements. Although these statements sometimes included quantitative information, they also included more nuanced, qualitative descriptions of economic conditions. However, measuring the effects of these qualitative communications is not straightforward. Taeyoung Doh, Sungil Kim, and Shu-Kuei Yang use a natural language processing tool to provide a new measure of how changes in qualitative descriptions of the economy in post-meeting statements affect bond prices. They find that qualitative descriptions of economic conditions and the balance of risk can have as much of an effect on bond prices as quantitative information about the target policy rate. In some cases, the tone of the Committee’s statement can affect financial market conditions even if no policy action is taken. Their new measure is generally correlated with alternative measures in prior research based solely on bond price data, and particularly well correlated with medium-term policy expectations.

Suggested Citation

  • Taeyoung Doh & Sungil Kim & Shu-Kuei X. Yang, 2021. "How You Say It Matters: Text Analysis of FOMC Statements Using Natural Language Processing," Economic Review, Federal Reserve Bank of Kansas City, vol. 106(no.1), pages 25-40, February.
  • Handle: RePEc:fip:fedker:90017
    DOI: 10.18651/ER/v106n1dohkimyang
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    More about this item

    Keywords

    FOMC; Monetary Policy; FOMC Statements; Natural language processing;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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