Taking the Fed at its Word: A New Approach to Estimating Central Bank Objectives using Text Analysis[Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand]

We propose a new approach to estimating central bank preferences, including the implicit inflation target, that requires no priors on the underlying macroeconomic structure nor observation of monetary policy actions. Our approach entails directly estimating the central bank’s objective function from the sentiment expressed by policymakers in their internal meetings. We apply the approach to the objective function of the U.S. Federal Open Market Committee (FOMC). The results challenge two key aspects of conventional wisdom regarding FOMC preferences. First, the FOMC had an implicit inflation target of approximatelyon average over our baseline 2000–11 sample period, significantly below the commonly assumed value of 2. Second, the FOMC’s loss depends strongly on output growth and stock market performance and less so on their perception of current economic slack.