Federal Open Market Committee Members Research Articles

Taylor Rule: The Information Content From FOMC Transcripts

Do Federal Open Market Committee (FOMC) discussions contain additional information for Taylor rule estimation? While researchers usually estimate a Taylor rule with official forecasts of the output gap and inflation, this paper sheds light on the importance of additional information contained in the FOMC discussions. Using textual analysis techniques I detect all economic phrases from FOMC transcripts and assign the tone to these phrases. Afterwards, I use Bayesian LASSO with time-varying parameters and show that the Fed changes its federal funds target also in response to FOMC members’ uncertainty about inflation expectations and financial markets.

The making of hawks and doves

Personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members’ FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.

Appropriate monetary policy and forecast disagreement at the FOMC

I study the forecast updating behavior of Federal Open Market Committee members to assess how individual views on appropriate monetary policy translate into disagreement about the macroeconomic outlook. I match the cross-sectional skewness in interest rates with its inflation and unemployment forecast counterparts and apply standard panel techniques to the data. I observe that hawkish minority voters tend to forecast higher inflation rates relative to the consensus view on the future economy. A higher degree of skewness in the individual inflation forecasts can be attributed mainly to regional Federal Reserve presidents’ minority views on appropriate policy. When investigating potential forecast exaggeration due to strategic motives, however, I find significant differences in the forecast updating behavior neither for Fed governors as opposed to regional Fed presidents nor for members voting with the majority as opposed to voting against the majority nor for stayers and switchers with respect to individual monetary policy stance.

In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy

I construct a novel measure of policy preferences of the Federal Open Market Committee (FOMC) as perceived in public. This measure is based on newspaper and financial media coverage of 130 FOMC members serving during 1960-2015. Narratives reveal that about 70 percent of these FOMC members are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. Hawk and Dove perceptions capture true tendencies as expressed in preferred rates, forecasts and dissents of these FOMC members well. At the FOMC level the composition of hawks and doves varies significantly, featuring slow- and fast-switching hawkish and dovish regimes, due to the rotation of voting rights each year, members’ turnover and swings in preferences.

A textual Taylor rule: estimating central bank preferences combining topic and scaling methods

AbstractScholars often use voting data to estimate central bankers’ policy preferences but consensus voting is commonplace. To get around this, we combine topic-based text analysis and scaling methods to generate theoretically motivated comparative measures of central bank preferences on the US Federal Open Market Committee (FOMC) leading up to the financial crisis in a way that does not depend on voting behavior. We apply these measures to a number of applications in the literature. For example, we find that FOMC members that are Federal Reserve Bank Presidents from districts experiencing higher unemployment are also more likely to emphasize unemployment in their speech. We also confirm that committee members on schedule to vote are more likely to express consensus opinion than their off schedule voting counterparts.

Disagreement between FOMC members and the Fed’s staff: New insights based on a counterfactual interest rate

We examine the degree and sources of disagreement between the members of the Federal Open Market Committee (FOMC) and the Federal Reserve’s (Fed’s) staff about the appropriate policy rate for the period 1994–2012. For that purpose, we compute a recommended interest rate for the Fed’s staff based on its own Greenbook forecasts and a time-varying monetary policy rule à la Taylor (1993), and compare it with the actual target rate. First, we find that there has been internal disagreement between FOMC members and the Fed’s staff about the appropriate policy rate. Second, we reveal that members with an occupational background in finance favor a relatively more hawkish monetary policy. In addition, a preference towards a tighter monetary policy is found under a Democratic President and during Alan Greenspan’s tenure as the Fed’s Chairman. Finally, higher oil prices, a low degree of uncertainty, and episodes of financial stability are also associated with higher interest rates as compared to the Fed staff’s recommendation.

Disagreement Among FOMC Members and Asset Prices

In recent years, central banks have focused on communication with financial markets, and have tended to conduct policy with high transparency in order to further enhance the effectiveness of monetary policy. In this research, we focus on the members of the U.S. Federal Open Market Committee (FOMC) which determines monetary policy and try to analyze how their disagreement affect investors’ behavior based on the announcements of macroeconomic indicators. In order to quantify disagreement among FOMC members, we collect text data on speeches by FOMC members and quantify them by applying text mining techniques. We then define disagreement among FOMC members through the dispersion of the quantified sentiments. Swanson and Williams (2014) show that investor response to the surprising announcements of macroeconomic indicators weakens under the zero interest rate constraint. In this research, consistent with Detmers (2016), we indicate that (1) investors’ response to surprising announcements of macroeconomic indicators weakens under forward guidance, (2) when disagreement among FOMC members is high, investors again react strongly to the announcements, and (3) investors are more aware of disagreement among members with voting rights than members who do not have at the FOMC meeting. Thus, disagreement, especially among members with voting rights, appears to lower the effectiveness of forward guidance to weaken the Fed’s commitment as perceived by investors, and to lead investors to be sensitive to the announcements of macroeconomic indicators.

Regional banking instability and FOMC voting

Abstract This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts’ regional banking sector instability into account when they vote. Considering the period 1979–2010, we find that a deterioration in a district's bank health increases the probability that this district's representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to Governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector.

Inconsistent voting behaviour in the FOMC

ABSTRACTThis article uses transcript data to examine determinants of inconsistent voting behaviour in the Federal Open Market Committee (FOMC) in the period 1989–2008. Inconsistent voting behaviour occurs if a member shows disagreement on the interest rate proposed by the chairman in the policy go-around, but this member agrees in the formal vote. Results show that after the 1993’s increase in central bank transparency, the probability of casting inconsistent votes decreases significantly, on average by 3.3 percentage points. FOMC members with longer tenure on the committee have a lower probability of casting inconsistent votes. Further results suggest that board members and bank presidents differ significantly, with bank presidents casting inconsistent votes more often than board members do. This relation holds true for gender as well, with female members casting more inconsistent votes than males. In addition, political aspects and career backgrounds also contribute to explaining inconsistent voting behaviour in the FOMC. Conditional effects reveal that after the change in transparency, differences between board members and bank presidents remain, whereas differences between male and female members have diminished. What is more, FOMC members with a career in the government sector have been strongly affected by the regime shift in transparency.

Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

AbstractWe study Federal Open Market Committee members' individual forecasts of inflation and unemployment in the period 1992–2004. Our results imply that Governors and Bank presidents forecast differently, with Governors submitting lower inflation and higher unemployment rate forecasts than bank presidents. For Bank presidents we find a regional bias, with higher district unemployment rates being associated with lower inflation and higher unemployment rate forecasts. Bank presidents' regional bias is more pronounced during the year prior to their elections or for nonvoting bank presidents. Career backgrounds or political affiliations also affect individual forecast behavior.

The Determinants of Disagreement between the FOMC and the Fed's Staff: New Insights Based on a Counterfactual Interest Rate

We examine the degree and sources of disagreement between the members of the Federal Open Market Committee (FOMC) and the Federal Reserve's (Fed's) staff about the appropriate policy rate for the period 1994-2011. For that purpose, we compute a recommended interest rate for the Fed's staff based on its own Greenbook forecasts and a time-varying monetary policy rule a la Taylor (1993), and compare it with the actual target rate. First, we find that there has been persistent internal disagreement between FOMC members and the Fed's staff about the appropriate policy rate. Second, we reveal that members with an occupational background in finance favor a relatively more hawkish monetary policy. In addition, a preference towards a tighter monetary policy is found under a Democratic President and during Alan Greenspan's tenure as the Fed's Chairman. Finally, higher oil prices, a low degree of uncertainty, and episodes of financial stability are also associated with higher interest rates as compared to the Fed staff's recommendation.

Appropriate Monetary Policy and Forecast Disagreement at the FOMC

I assess how dissenting views on appropriate monetary policy result in disagreement about the macroeconomic outlook of Federal Open Market Committee members. FOMC members that voted for a higher Fed Funds Rate than the majority of voters also forecast higher inflation rates, while they forecast lower unemployment rates relative to the consensus view on the future economy. Voters that tighten their stance revise inflation forecasts to the upside and unemployment forecasts to the downside. Members that switched their voting status between forecasting rounds, i.e., switched from voting with the majority to being a dissenting minority voter, or switched vice versa, are significantly more hesitant in revising their macroeconomic forecasts.

Measuring Deliberative Conditions

Drawing from the literature on deliberative conditions, we analyze thirty years of verbatim transcripts of the Federal Open Market Committee (FOMC). The transcripts provide a rare opportunity for the systematic empirical analysis of deliberative conditions. The importance of the FOMC, and its recent policy failures, makes the case particularly interesting. Deliberative scholars argue that deliberation should occur in a setting where participants are free and equal. Using a unique set of deliberative measures, our model shows that FOMC members do enjoy deliberative freedom. In contrast, we find inequalities in rates of participation. Some deviation from equality may be reasonable. However, we demonstrate a sustained pattern of gender inequality in participation that could in turn influence the FOMC’s policy choices and which is difficult to justify on any grounds.

USING FORECASTS TO UNCOVER THE LOSS FUNCTION OF FEDERAL OPEN MARKET COMMITTEE MEMBERS

We revisit the sources of the bias in Federal Reserve forecasts and assess whether a precautionary motive can explain the forecast bias. In contrast to the existing literature, we use forecasts submitted by individual Federal Open Market Committee (FOMC) members to uncover members' implicit loss function. Our key finding is that the loss function of FOMC members is asymmetric: FOMC members incur a higher loss when they underpredict (overpredict) inflation and unemployment (nominal and real growth) as compared to their making an overprediction (underprediction) of similar size. We also find that an asymmetric loss function, in some cases, weakens evidence against forecast rationality, though results depend on the variable being projected and the subgroup of FOMC members being studied. Furthermore, we add to the recent controversy on the relative quality of FOMC forecasts compared to staff forecasts. Our results suggest that differences in predictive ability could indeed stem from differences in preferences.

FOMC Forecasts as a Focal Point for Private Expectations

We explore empirically the theoretical prediction that public information acts as a focal point in the context of the U.S. monetary policy. We aim at establishing whether the publication of Federal Open Market Committee (FOMC) inflation forecasts affects the cross‐sectional dispersion of private inflation expectations. Our main finding is that publishing FOMC inflation forecasts has a negative effect on the cross‐sectional dispersion of private current‐year inflation forecasts. This effect is found to be robust to another survey data set and to various macroeconomic controls. Moreover, we find that the dispersion of private inflation forecasts is not affected by the dispersion of views among FOMC members.

Evaluating the economic forecasts of FOMC members

This paper provides a detailed analysis of the forecasts of real GDP, inflation and unemployment made by individual members of the Federal Open Market Committee (FOMC) for the period 1992–2003. Despite a general tendency for the committee members to underpredict real GDP over the sample period, we find evidence suggesting that the FOMC has a considerable amount of information about output growth, beyond what is known by commercial forecasters. We also document a substantial level of variation in the members’ forecasts, which can be explained in part by the differences in economic conditions between Federal Reserve districts. The members’ heterogeneous forecasts for output growth and inflation contain useful information for explaining their preferred policy settings, beyond that in the Greenbook forecasts.

Forecast dispersion, dissenting votes, and monetary policy preferences of FOMC members: the role of individual career characteristics and political aspects

Using data from 1992 to 2001, we study the impact of members’ economic forecasts on the probability of casting dissenting votes in the Federal Open Market Committee (FOMC). Employing standard ordered probit techniques, we find that higher individual inflation and real GDP growth forecasts (relative to the committee’s median) significantly increase the probability of dissenting in favor of tighter monetary policy, whereas higher individual unemployment rate forecasts significantly decrease it. Using interaction models, we find that FOMC members with longer careers in government, industry, academia, non-governmental organizations (NGOs), or on the staff of the Board of Governors are more focused on output stabilization, while FOMC members with longer careers in the financial sector or on the staffs of regional Federal Reserve Banks are more focused on inflation stabilization. We also find evidence that politics matters, with Republican appointees being much more focused on inflation stabilization than Democratic appointees. Moreover, during the entire Clinton administration ‘natural’ monetary policy preferences of Bank presidents and Board members for inflation and output stabilization were more pronounced than under periods covering the administrations of both George H.W. Bush and George W. Bush, respectively.

Strategic behavior of Federal Open Market Committee board members: Evidence from members’ forecasts

In this paper, we use panel data to test whether Federal Open Market Committee (FOMC) board members’ forecasts are rational. Rationality is rejected in the sense that forecasts by members are heavily dependent on previous own forecasts and last consensus made in FOMC. Furthermore, we reveal the strategic behavior of FOMC board members. Forecasts by governors, who always have voting rights, agree much with the previous consensus of FOMC members’ forecasts. In contrast, non-governors, who rotate voting rights, exaggerate their forecasts: they aggressively deviate their forecasts from previous consensus. The former is herding behavior and the latter is anti-herding behavior. Our results imply that individual members behave strategically; governors want to present policy-consistent forecasts to the Congress and non-governors utilize their forecasts to influence decision making in FOMC.

Strategic Behavior of Federal Open Market Committee Board Members: Evidence from Members' Forecasts

In this paper, we use panel data to test whether Federal Open Market Committee (FOMC) board members’ forecasts are rational. Rationality is rejected in the sense that forecasts by members are heavily dependent on previous own forecasts and last consensus made in FOMC. Furthermore, we reveal the strategic behavior of FOMC board members. Forecasts by governors, who always have voting rights, agree much with the previous consensus of FOMC members’ forecasts. On the other hand, non-governors, who rotate voting rights, exaggerate their forecasts: they aggressively deviate their forecasts from previous consensus. The former is herding behavior and the latter is anti-herding behavior. Our results imply that individual members behave strategically; governors want to present policy-consistent forecasts to the Congress and non-governors utilize their forecasts to influence decision making in FOMC. JEL Classification: D03; E27; E43; E52

European Central Bank leaders in the global space of central bankers: A Geometric Data Analysis approach

In this article, we analyse the space of the world's central bankers since the second half of the 1990s on the basis of a collection of public biographical data. The world's central bankers compose a global ‘reference space’ for the study of ECB leaders. ECB leaders are distinctive in certain dimensions of this space, especially in relation to the Asian (Japanese and Chinese) central bankers and, although to lesser extent, in relation to the US Federal Open Market Committee members. These distinctions relate to the properties of two different sub-groups of ECB members of the Governing Council: one group composed of the members of the executive board, and another comprising the governors of the national central banks. This article stresses the methodological use of Geometric Data Analysis when applying a multi-level and sociological perspective to the central bank's decisions and discourses: in the process of examining the relevant social space, this approach allows us to study the inter-individual social variations between agents at a micro-level and to analyse institutional differences in behaviour as a probable consequence of these variations. Monetary strategies and economic discourses of central banks are analysed as the probabilistic products of a combination of individuals’ orientations, which in turn are the results of variations in their biographical experiences, based on different cultural and cognitive dispositions.