Central Bank Information and Policy Transmission
Paper Session
Monday, Jan. 4, 2027 8:00 AM - 10:00 AM (EST)
- Chair: Scott Wolla, Federal Reserve Bank of St. Louis
Learning from Central Bank Speeches
Abstract
Central bank communication plays a crucial role in shaping market expectations and the transmission of monetary policy. This paper examines how speeches by central bank governors influence market expectations of future monetary policy using a novel dataset covering speeches from central banks in 20 advanced economies and 10 emerging markets. We quantify the tone and content of speeches by central bank governors using an LLM and link them to daily movements in interest-rate expectations. We establish that each of the topic, tone, and timing of speeches are crucial determinants of their impact. Speeches only move interest-rate expectations when the topic covers monetary policy. The effect of speeches on interest-rate expectations is amplified when the text provides clarity on future of the economic outlook and the path of monetary policy. The impact on expectations is largest during tightening cycles and when markets are less aligned with the intended policy stance—that is, when market expectations are initially further from the targeted policy rate. We rationalize our findings using a learning model with incomplete information about the central bank reaction function.Political Shocks and Public Beliefs about Central Bank Credibility
Abstract
We study how political shocks affect public beliefs about central bank credibility and macroeconomic expectations. We field a high-frequency weekly panel survey of U.S. households, covering several salient political events, including the announcement of an investigation into Federal Reserve Chair Jerome Powell and the subsequent nomination of a new Fed Chair. The design combines individual-level panel variation with a randomized information experiment embedded in the post-nomination survey.We document three main findings. First, political shocks significantly shift macroeconomic expectations. The nomination of a new Fed Chair reduces inflation expectations and alters beliefs about future interest rates, with effects varying by respondents’ political affiliation. Second, trust in the Federal Reserve responds asymmetrically: while expectations adjust immediately, trust exhibits more muted and heterogeneous responses across groups. Third, randomized information treatments show that emphasizing political alignment or market signals affects both expectations and perceived Fed independence, suggesting that belief updating operates through a politicization channel.
Our results highlight that central bank credibility is not only shaped by policy actions but is also sensitive to political narratives and leadership changes. Ongoing data collection allows us to track the persistence of these effects and their implications for expectation formation.
The Current-Month Fed Information Effect
Abstract
Interest rate changes by the Federal Reserve may reveal private information about the state of the economy, leading forecasters to react both to the direct effect of the change on the macroeconomy, and to the information revealed. We isolate and identify forecaster reaction to the information revealed using a novel dataset of daily frequency forecasts of macroeconomic releases. The unexpected component of an interest rate change cannot have a direct effect on the current month's releases because their underlying data comes from the prior month or quarter. That surprise component can only affect forecaster expectations through the information channel. Using a difference-in-differences framework around FOMC meetings while controlling for other macro releases, we find that, consistent with the information channel, positive surprises increase forecasts of inflation: a 1 bp surprise leads to current month Core PCE inflation forecasts increasing 1 bp.When the Fed Reveals Its Hand: The SEP and Monetary Policy Surprises
Abstract
Recent advances in high-frequency identification of monetary policy shocks reveal that measures are contaminated by information and news effects. We contribute to this literature by incorporating the intermittent release of central bank projections, i.e. the Summary of Economic Projections (SEP). We develop a theoretical framework showing that forecast releases amplify monetary policy surprises by providing additional information beyond what is conveyed through interest rate decisions alone and by anchoring expectations during non-release meetings. We confirm empirically that monetary policy surprises following SEP releases are typically 2 to 3 times larger than those without releases. To identify the information effects, we construct novel SEP surprise measures using a Bloomberg survey of market expectations about Federal Reserve projections. SEP surprises explain about 30 percent of the variation in monetary policy surprises during SEP meetings and account for essentially all of the differences between SEP and non-SEP meetings. Finally, to validate that SEP surprises contain economically meaningful information, we show that individual forecasters update their expectations of core PCE inflation in response to both common and their own idiosyncratic SEP surprises.Words versus Rates: The Multidimensional Communication Channel of the Federal Reserve
Abstract
Federal Reserve communication increasingly shapes financial conditions independently of the policy rate, yet it remains unclear which messages matter, when they matter most, and whether statements and press conferences transmit distinct information to markets. We develop a high-frequency framework that decomposes FOMC statements and Chair press conferences into economically interpretable narrative dimensions and identifies content-specific communication shocks orthogonal to both target-rate and path surprises. To our knowledge, this is the first design that separates multiple narrative channels from the full set of conventional policy surprises within a unified identification scheme. Our communication indices—covering inflation risk, real-activity assessment, reaction-function signaling, forward guidance, balance-sheet policy, and financial-stability language—combine time-varying structural topic models with large language models applied to every post-meeting statement and press-conference transcript since 2011. Within narrow announcement windows, we orthogonalize statement and press-conference shocks to conventional surprises and exploit cross-asset responses to distinguish genuine communication effects from central-bank information and coincident macro news. Distinct narrative dimensions—particularly inflation-risk, reaction-function, and forward-guidance language—generate independent and economically significant movements in Treasury yields, breakeven inflation, forward rates, equities, exchange rates, credit spreads, and option-implied volatility. These effects are strongly state dependent: largest near the effective lower bound, in high-uncertainty environments, and during episodes dominated by supply-side and geopolitical shocks. Comparing formats, statements matter more when markets seek clarification of the policy rule, while press conferences gain influence when markets must assess persistence, trade-offs, and risk management. More informative forward guidance also attenuates the marginal asset-price response to target and path surprises, implying partial substitution between communication and conventional policy instruments. The results demonstrate that monetary transmission cannot be inferred from rate decisions alone and that the design and timing of central-bank communication are first-order policy choices.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit