With the next FOMC interest rate decision rapidly approaching, we wanted to see how the Fed’s language has evolved since Janet Yellen took over from Ben Bernanke in the beginning of 2014. To do so, we extracted the top phrases from each FOMC statement since March of 2013, then we counted how many times each Chairperson had used the phrase in a statement. Then we drew a network graph showing which statements were preferred:
However, the graph shows a significant divergence between the two central bankers, both in the tone and topic of discussion. We can see that under Yellen, the FOMC statements have repeatedly noted “ongoing improvement” in the economy. Bernanke’s speeches were of a different character, stressing the need to be “highly accomodative” toward economic growth. This divergence probably reflects the changing economic environment: during the last year the US economy has continued to recover.
The nascent recovery has raised the probability that the Fed could begin raising rates later this year, which has no doubt contributed to a further change in tone between the two Chairs. Under Bernanke’s tenure, FOMC statements often made reference to the term “committee decided”, as in the “Committee decided to leave asset purchases unchanged…”
In contrast, statements issued under Yellen have included much less certain language, falling back on the rhetorical tools of her profession to hedge their predictions, using terms such as:
- “committee expects”
- “committee sees”
- “committee judges”
It is also interesting to note that statements have started to include discussion of “longer-term inflation” which was conspicuously absent from Bernanke’s last statements. With pressure mounting on the FOMC to normalize policy given the recovery in the US, it will be interesting to see if Yellen will continue to hedge her bets or whether a clear policy will emerge going forward. It remains likely that US economic strength will make it increasingly awkward for the committee to remain in a zero rate environment. The question remains, however, whether our economic system is strong enough to stand without massive central bank support.
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