Monetary policy in the news: communication pass-through and inflation expectations

Summary

Focus

In recent decades, central banks have placed increasing emphasis on communication with the public as a critical tool to explain monetary policy decisions and help anchor inflation expectations. While a large body of research has shown that central bank communication is effective in influencing financial markets, much less is known about central banks' ability to reach the broader public. Survey evidence shows that households acquire information about monetary policy mostly from traditional media. Hence, for central banks to effectively influence the public, it is critical that the media cover their communication accurately.

Contribution

We examine the degree of consistency between the official communication of the Federal Reserve (the Fed) and its media coverage. Using recently developed large language models, we assess the sentiment regarding the stance of monetary policy – whether dovish, neutral or hawkish – from Fed communication and articles published in major news outlets from 1994 to 2023. We then compare the sentiment in Fed communication with that in the media, examining differences over time and across communication instruments. Finally, we investigate whether the media sentiment influences households' inflation expectations.

Findings

The media generally portray the sentiment expressed in Fed communication accurately, although there have been significant changes over time. The pass-through of Fed communication to the media weakened considerably when interest rates reached the zero lower bound after the Great Financial Crisis and the Fed deployed untested unconventional monetary policy tools. The pass-through then improved with the introduction of press conferences after monetary policy decisions, which now play a predominant role in shaping media coverage. We also document a weaker communication pass-through at the beginning of a new Fed chair's tenure. Finally, we find that media sentiment tends to influence households' inflation expectations, with a hawkish change in sentiment lowering medium-term inflation expectations. In contrast, we do not detect any association between households' expectations and the sentiment directly expressed in Fed communication, which is consistent with the notion that households acquire information about monetary policy from the media.

Abstract

We analyse the media's role in channelling information about the Fed's monetary policy stance to the public. Using LLMs, we find a tight correspondence between FOMC communication and media coverage, although with significant variation over time. The communication pass-through weakened during the ZLB period and improved with the introduction of press conferences, which now exert strong influence on the media. Media coverage effects households' inflation expectations, particularly when inflation is high and volatile, while we do not detect a direct impact of FOMC communication. This underscores the media's crucial function in channelling central banks' communication to the public.

JEL classification: E50, E52, E58

Keywords: central bank communication, media coverage, large language models, households' expectations