Beyond FOMC meetings: understanding Federal Reserve officials' monetary policy biases.
Using the Advance Macro FOMC Hawk/Dove Score Index (Fed's officials' speeches), the article explores how the Federal Reserve officials' public speeches can reveal their monetary policy biases.
Reading time: 4 mins.
Federal Reserve officials regularly attend public engagements and contribute with public speeches at regular intervals. This practice has several benefits, from increased transparency about the conduct of monetary policy to more stable anchoring of inflation expectations. More precisely, the Federal Reserve can use these speeches as an occasion to educate the public about the recent and upcoming policy decisions as well as for communicating its economic outlook.
In this article, we analyse the informational content of these speeches to construct a measure of hawkish/dovish stance, labelled as the Advance Macro FOMC Hawk/Dove Score Index (speeches).
The methodology is simple. We analyse each sentence in Fed official's speeches (available here) and label it as hawkish, dovish, or neutral. We then aggregate the overall score for each speech by calculating the difference between the counts of hawkish and dovish sentences, normalized by the total number of sentences in the speech. These scores calculations are carried out for all the Fed officials who sit as members of the FOMC.
The calculation of these scores at the speech level naturally complements the analysis we carry out at the press-conference level, where we analyse the tone of press-conference transcripts, see Advance Macro FOMC Hawk/Dove Score Index (press-conferences).
Case study: Analysing Governor Jefferson address at the MBA.
In Figure 1, we plot the actual calculated Advance Macro FOMC Hawk/Dove Score Index for the speech "U.S. Economic Outlook and Housing Price Dynamics" given by Governor Jefferson at the MBA’s Secondary and Capital Markets Conference and Expo 2024, in New York . The overall calculated score for the speech was 0.22 which is plotted against the historical distribution for Governor's Jefferson scores with the median score, see Figure 1. This is done to understand how the latest score can be interpreted in relative terms, or better yet, how it can be framed within the historical monetary policy biases of each governor.
From Figure 1, two pieces of information emerge. Firstly, Governor Jefferson is historically framed as a mild "hawk," as indicated by the median score (dashed vertical line) being above zero. Secondly, the latest speech score is heavily skewed towards the hawkish side (see yellow circle). This is not surprising, as the Governor made clear remarks on inflation still being too high compared to the Fed's target, stating, "However, inflation remains above the Federal Open Market Committee's (FOMC) 2 percent inflation objective," while further adding, "I believe that our policy rate is in restrictive territory as we continue to see the labor market come into better balance, and inflation decline although nowhere near as quickly as I would have liked."
Aggregating scores across Members of the FOMC committee.
While it is instructive to scrutinize individual FOMC members' skewness towards monetary policy stance, it may also be interesting to collate all the information available from individual members to gauge a measure of the committee members' overall monetary policy stance. This is what we do in Figure 2. More precisely, we plot two rolling measures of summary statistics for the distribution of individual scores: the rolling mean and the rolling skewness, both calculated over the previous 60 speeches. These two measures are plotted against the federal funds target rate (upper).
From Figure 2, we can deduce that the difference between the skewness and mean of the Advance Macro FOMC Hawk/Dove Score Index is useful in anticipating upcoming monetary policy changes. More precisely:
- when skewness crosses the mean from below, it signals a committee consensus shift towards hawkishness, whether this is more fed funds target hikes or the Fed maintaining an existing hawkish stance for longer.
- conversely, when skewness crosses the mean from above, it indicates a consensus shift towards dovishness, again whether this is more fed funds target cuts or the Fed maintaining an existing dovish stance for longer.
Recent scores and implications for upcoming monetary policy.
From the latest readings of the scores, a strong hawkish bias still prevails among Fed officials. Despite the score rolling mean embarking on a steady decline towards a more neutral stance, the skewness measure is at historical heights. This does not necessarily imply that interest rates will need to rise further, but can be interpreted as the committee's view that the current monetary policy stance might be kept restrictive "for a while". This corroborates the latest views of FOMC members needing decisive evidence of a sustained decline in inflation towards the 2% target.
The Advance Macro FOMC Hawk/Dove Score Indexes are part of our Central Bank E-monitor subscription offering. Subscribe today to gain valuable insights into FOMC communication.
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Disclaimer: The information contained in this article is for informational purposes only and should not be construed as investment advice, financial guidance, or a recommendation to buy or sell any financial instruments. This article does not take into account any specific investment objectives, financial situation, or particular needs of any individual. Before making any investment decisions, you should seek advice from a qualified financial advisor who can take into account your individual circumstances. The authors and publishers of this material expressly disclaim any liability for any loss arising from any reliance on the information provided herein.