The FOMC versus the Staff: Do Policymakers Add Value in Their Tales?

74 Pages Posted: 31 Aug 2023

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

James Mitchell

Federal Reserve Bank of Cleveland

My T. Nguyen

Washington University in St Louis, John M. Olin Business School

Date Written: August 30, 2023

Abstract

Using close to 40 years of textual data from FOMC transcripts and the Federal Reserve staff's Greenbook/Tealbook, we extend Romer and Romer (2008) to test if the FOMC adds information relative to its staff forecasts not via its own quantitative forecasts but via its words. We use methods from natural language processing to extract from both types of document text-based forecasts that capture attentiveness to and sentiment about the macroeconomy. We test whether these text-based forecasts provide value-added in explaining the distribution of outcomes for GDP growth, the unemployment rate, and inflation. We find that FOMC tales about macroeconomic risks do add value in the tails, especially for GDP growth and the unemployment rate. For inflation, we find value-added in both FOMC point forecasts and narrative, once we extract from the text a broader set of measures of macroeconomic sentiment and risk attentiveness.

Keywords: monetary policy, sentiment, uncertainty, risk, forecast evaluation, FOMC meetings, textual analysis, machine learning, quantile regression

JEL Classification: E17, E31, E52, E58

Suggested Citation

Filippou, Ilias and Mitchell, James and T. Nguyen, My, The FOMC versus the Staff: Do Policymakers Add Value in Their Tales? (August 30, 2023). FRB of Cleveland Working Paper No. 23-20, https://doi.org/10.26509/frbc-wp-202320, Available at SSRN: https://ssrn.com/abstract=4556839

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

James Mitchell (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://https://www.clevelandfed.org/en/our-research/economists/james-mitchell.aspx

My T. Nguyen

Washington University in St Louis, John M. Olin Business School ( email )

Room 274 Simon Hall
Washington University in St. Louis
St. Louis, MO 63130
United States
6188183228 (Phone)

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