How Transparency Transformed the Fed

Some of the most anticipated events in the financial world are the 8 meetings that the US Federal Reserve has to form monetary policy that affects the economies of the world. The press releases are widely read by just about every member of the finance industry and beyond. The transparency of the Fed wasn't always the norm and has caused FOMC participants to be more wary with their commentary.

The talkative Fed wasn't a phenomenon until Alan Greenspan's tenure during the 1990s. During his time, press conferences and economic indicator estimates were released, and in 1993, it was decided that FOMC private meeting notes would be released with a five-year lag. The change in the publicity of the FOMC minutes has allowed for a comparison to be made between commentary that was given with the knowledge it is going public and without. The Central Bank of Sweden used the FOMC minutes to analyze the tone and informativeness of the commentators in FOMC minutes between 1993-2012 in a working paper titled "How Much Information Do Monetary Policy Committees Disclose?"

Their findings indicated that as the net hawkishness of the released minutes increase, so did the hawkishness of the monetary policies that followed. They also found that the chairperson's net hawkishness had the most predictive value on the upcoming policy when considering that variable alongside the transcript measure. However, neither provided statistically significant value when considered with the transcript. This suggests, as noted by the paper, "the importance of building agreement when making a policy decision that is likely to be less popular among the public."

The researchers also decided to consider a measure of agreement between the FOMC members in the minutes using dictionary analytics used on congressional debates. With this new agreement index, they found that net hawkishness and agreement were statistically significant for policy changes, both easing and tightening. In particular, they found that increased agreement coincided with monetary tightening, and the lack of agreement tended to point to more monetary easing.

Overall, the transcripts provide the best predictive power as, "a unit increase in the net hawkishness of sentiment is associated with a 0.51 probability increase in future tightening." In other words, the Fed's policy of transparency has done a good job of indicating what policy updates will be while maintaining consistency in its publications. This, of course, is necessary when every time they meet, the financial world hangs on every word.


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