We recently had the last FOMC decision of 2024. Market l participants reacted to the hawkish tone including Powell’s comments that the Fed’s year-end inflation projection has “kind of fallen apart.”, as well as shifts in the dot plot. It is intuitive that what the Fed says has a huge impact on markets, as well as obviously, actual shifts in policy.
For several years, we’ve been collecting Fed communications, whether it’s speeches and testimonies from FOMC members, statements of FOMC decisions, as well as minutes. We’re currently in the process of refreshing our history of Fed communications dataset at Turnleaf Analytics. We’ve scoured for additional communications, improving the format etc. We have sourced over 7000 Fed communications which span the past 30 years.
What have we learnt from this exercise of collecting and reading several thousand FOMC communications? I’ve picked out a small number of answers. I thank in advance the Turnleaf Analytics team and in particular Ben Cariss for their help in this very large undertaking!
There are many different types of Fed communications
The Fed has a decentralised structure. As well as the Federal Reserve Board in Washington DC, there are 12 regional branches that cover broadly contiguous areas of the country. There are exceptions to this, for example the New York Fed covers not only New York State and Connecticut, but it also includes Puerto Rico. Hence, we have many potential sources for Fed communications, and they can vary significantly in their type.
Of course, we have FOMC statements, minutes and press conferences, describing FOMC decisions. However, other communications are far more numerous. These include speeches from Fed speakers. Whilst each of these will usually be prefaced by the disclaimer that these are personal opinions of the individual Fed speaker and not the FOMC as a whole, they can nevertheless give us some insight into what the Fed is thinking (there are of course nuances to this, for example, is the Fed speaker, a voter or not in the current year). On top of the speeches, there are also testimonies, interviews, panels etc.
From a technical perspective, there are numerous formats for Fed communications, and these also change over time. Trying to navigate all these formats can be tricky and require a lot of work to harmonise all the texts and cleaning into a common format. Whilst this process can be heavily automated using tools like regular expressions, and more broadly various NLP techniques, it does often require a lot of manual work. For example, whilst PDFs give the appearance of sharing a common format, their quality can vary significantly, and they require a lot of special care.
Fed speakers are drawn from different academic backgrounds
Whilst, many Fed presidents and governors do have economic backgrounds, this is not a universal rule. Indeed the current Fed chair, Jerome Powell has a background in law, and worked both as an investment banker and in government in other roles before moving to the Fed. In this quotation from Pres. Dudley he discussed the backgrounds of various New York Fed presidents.
“Having an economics background probably helps, especially on the analytics side, but, in my view, is by no means necessary and certainly not sufficient. One point on which I am certain is that regardless of the background of the President, having a very strong research group is essential.” Pres. Dudley on 4 January 2014
Each Fed region has different nuances
What drives the economy in each Fed district varies. For example, if we read Fed speakers in the Midwest, such as those from Kansas City Fed, and agriculture often comes up as a subject. By contract, those from the East Coast are rarely focused on agriculture, given it’s a much smaller industry in their part of the country. We can often pick up interesting points about economic activity from each region from Fed speakers, with an example below from Pres. Dudley.
“A little known fact is that, on average, jobs pay more in the Bronx than in any other of the five boroughs, except for Manhattan.” Pres. Dudley on 8 May 2015
The Fed does a lot more than monetary policy
Whilst financial market participants evidently focus on the Fed’s role setting monetary policy, it is also responsible for regulation and payments across the United States. In the below quote, we see Pres. Dudley taking aim at compensation, as a problem in the context of driving excessive risk taking. Obviously, this means that not every single communication will have relevance for monetary policy.
“I noted earlier that improving a financial firm’s culture will take sustained determination and commitment from its senior leaders. Deferred compensation can play a useful role in reinforcing buy-in of senior leadership to this endeavor.” Pres. Dudley on 21 October 2014
The Fed can look towards other central banks
When it comes to monetary policy, other central banks often follow the lead of the Fed. However, when going through Fed communications, there are instances, where the Fed have drawn lessons from other central banks.
On 25 January 2012, Chairman Bernanke formally set an explicit inflation target for the Fed of 2%, moving from a target range. Many other central banks had already adopted inflation targets. Reading through communications before that point, the discussion about inflation targeting came up frequently, here in the context of looking at the Canadian experience.
“Interestingly, the major lesson drawn from the Canadian experience with inflation targeting relates to credibility and inflation expectations. After inflation fell to 2 percent, expectations began to closely track the announced inflation target. With the low inflation target becoming increasingly credible, the nature of inflation in Canada began to change. During the 1990s, inflation became less responsive to short-run supply and demand excesses as well as to relative price shocks. Canada also enjoyed increased stability in its real economy. As compared to the preceding decade, the first decade of inflation targeting showed less volatility in both output growth and the unemployment rate. In short, inflation targeting worked as an automatic stabilizer in response to a whole range of economic disturbances.” Pres. Santamero on 10 June 2003
There are advertising bibs for cows grazing besides highways
For Fed communications to be transparent, they need to be to the point. After all the whole point of communications is to communicate to the public! However, this doesn’t mean that they can’t inject a bit of humor in them from time to time. Here is Pres. Lockhart talking about chindogu in the context of a speech about Japan’s importance to the US economy.
“There is one other Japanese concept I admire because it demonstrates the Japanese sense of humor. It is chindogu. I am a prospective member of the International Chindogu Society. For the Americans here tonight, chindogu is the Japanese word for the art of the “unuseless” invention. Unuseless here means almost completely useless, but with just a hint of serious purpose. Examples of chindogu inventions are eyelid clips to stay awake in boring meetings. Or bedroom slippers encased in dust mops to clean your floor while you shuffle around the house. I submitted the idea of advertising bibs for cows grazing beside highways, but this idea has actually been put into practice in Holland. A rule of the International Chindogu Society is, if you invent something that turns out to be so handy you actually use it, you have failed to make a chindogu. You should go to the patent office. ” Pres. Lockhart on 4 June 2008
Don’t be an “inflation nutter”
The Fed has a dual mandate, with both the pursuit of maximum employment and price stability. In this quote from Pres. Poole, he acknowledges the importance of keeping inflation in check, but noting at the same time, a central bank has other objectives.
“Thus, emphasizing the importance of price stability does not mean that the central bank must forego all other objectives. The central bank should not become-in the now famous phrase of Mervyn King-an “inflation nutter.”” Pres. Poole on 16 February 2006
GDP is an estimate and can’t measure everything
The Fed doesn’t have an explicit GDP target. As with every economic indicator, we need to remember that it is an estimate. The same is true for example of CPI, which is based on the basket of an average consumer. Pres. Williams notes that there are many things GDP can’t measure, using a quotation from Robert Kennedy.
“Even those of us economists who are most dedicated to our craft, recognize that there sometimes is a limit to what economic policy can do. Robert Kennedy once famously noted that the measure of GDP, for example, quote “does not allow for the health of our children, the quality of our education or the joy of our play. It does not include the beauty of our poetry … [or] the intelligence of our public debate … It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.” Pres. Williams on 30 March 2017
Fed speakers like to play around with speech titles (like the rest of us)
Browsing through Fed communications, most titles are of the type “Economic Outlook”. However, there can sometimes be a few more fun titles that crop up, a few of which we’ve listed below.
Dancing Days Are Here Again: The Long Road Back to Maximum Employment – Pres. Williams on 2 December 2015
Themistocles and the Mathematicians: The Role of Stress Testing – Vice Chair for Supervision Quarles on 25 February 2021
On the Road Ahead, Cherish the Detours – Gov. Kugler on 18 May 2024
In the face of market crises, the Fed has cut in past
We’ve all witnessed in more recent times, that the Fed has eased policy in the face of crises, most notably during COVID, and further back during the Great Financial Crisis. This isn’t a new phenomenon and has happened numerous times in the past, as evidenced by this quotation from Pres. Santomero.
“Seeing these developments, the Fed did not raise interest rates, allowing the positive impact of a surge in productivity growth to play out, even as the economy blew past economists’ conventional thresholds for sustainable output growth and unemployment. In fact, the Fed eased policy in the fall of 1998 to help insulate the expansion from the international financial turmoil triggered by the problems at LTCM.” Pres. Santomero on 17 January 2001
The Fed is not the first United States central bank
The Federal Reserve System was established in 1913. However, it is actually the third central bank to be established in the United States, as discussed by Pres. Santomero.
“In fact, the United States had made two previous attempts to establish a central bank. The First Bank of the United States was established in 1791, and the Second Bank of the United States was established in 1816. Congress gave each an initial 20-year charter. Yet, neither was able to muster the political support to have its charter renewed. Therefore, the United States spent most of the nineteenth century without a central bank.” Pres. Santomero on 13 June 2002
This AI cycle is simply the latest instance of technology driving a cycle
The current hype around AI has helped to drive markets, with stocks like Nvidia. Again, the notion of new technology driving the cycle is nothing new. What is different is the type of technology. Here Pres. Santamero discusses the dotcom boom.
“Lesson #1: Technological innovation can drive a cycle
The first lesson that I take away from an examination of our most recent economic episode is that new technologies and investment in new technologies can be powerful drivers of business cycle dynamics. The most recent business cycle, from the historic 10-year expansion to the recession of 2001 and the subsequent recovery, was an investment driven one. Growth in investment spending strengthened and sustained the expansion of the 1990s. Then the collapse in business investment spending generated the recession and attenuated the recovery. Finally, the return of business investment spending ushered in the broader economic recovery in 2003.
At the same time, the increased productivity experienced in the late 1990s, due to the large investment in information and communication technology (ICT), allowed the United States economy to produce high levels of output while not experiencing inflationary pressures.” Pres. Santamero on 11 April 2005
Changes in monetary policy are not always popular
This is stating the obvious, but sometimes the “right” thing to do with monetary policy, is not popular, but is still necessary for the long term health of the economy. Indeed, this is the main reason that Fed policy is independent. Here Pres. Hoenig talks about choices the Fed needed to make during the financial crisis, with a quote taking from Paul Warberg, who served as the second vice chairman of the Federal Reserve from 1916 to 1918.
“In a country whose idol is prosperity, any attempt to tamper with conditions in which easy profits are made and people are happy, is strongly resented. It is a desperately unpopular undertaking to dare to sound a discordant note of warning in an atmosphere of cheer, even though one might be able to forecast with certainty that the ice, on which the mad dance was going on, was bound to break. Even if one succeeded in driving the frolicking crowd ashore before the ice cracked, there would have been protests that the cover was strong enough and that no disaster would have occurred if only the situation had been left alone.”1
There are many challenges ahead, many choices to make. Some I suspect will be desperately unpopular. – Pres. Hoenig on 6 May 2008
1 Paul M. Warburg, The Federal Reserve System, Its Origin and Growth, Rejections and Recollections, published April 1930, by the Macmillan Company
Conclusion
It’s not possible to distil every single message learnt from the Fed from thousands of different communications over the past thirty years in a single article. I hope I’ve at least given an illustration of the types of messages we can see in Fed communications. Clearly, communications around FOMC decisions are market moving and important. However, there are many more Fed communications that can be tracked, which can give us earlier insights into what the Fed is thinking of doing.