Tales of Turbulence: BERT-Based Multimodal Analysis of FED Communication Dynamics Amidst COVID-19 through FOMC Minutes

Abstract

Although communication of the central banks with the market was still quite limited at the end of the 20th century, and the authorities had agreed that policymakers should hold a more secretive attitude, this situation changed after the 2000s, in light of the Australian example. From there on, the view that decisions should spawn surprise in the market to increase the effectiveness of monetary policy has been replaced by the discourse that claims that the strategy, policy, and short- and long-term goals of the central banks should be precisely understood by the public. Moreover, communication tools have come to the fore as vital support for the monetary policy decision-making processes, especially in countries that have adopted inflation-targeting regimes. Consequently, today, communication is of great importance for the central banks to realize their mission. This study analyzes Federal Open Market Committee (FOMC) minutes using state-of-the-art Natural Language Processing (NLP) techniques. We sought to investigate the effect of the global COVID-19 crisis on the FOMC minutes' pattern and the strength of the Federal Reserve to influence inflation expectations through its primary press releases. To this end, we first quantified minutes leveraging domain-specific pre-trained Bidirectional Encoder Representations from Transformers models (FinBERTs). Then, we applied Dynamic Time Warping (DTW) to measure temporal sequence proximity over the course of time. To verify our findings, we built multivariable Autoregressive Integrated Moving Average models by injecting an exogenous variable as an indicator function into the time series (ARIMAX). The results suggest that the Federal Reserve has abstained from adjusting its tone and the forward-lookingness setting of its statements for the global epidemic. Therefore, the longstanding association of fed tone and forward-lookingness with consumer inflation expectation has weakened during the crisis.