Mind the tone: Responses of inflation expectations to central bankers’ speeches

Abstract

This study investigates the effect of central bank communications, measured as the tone of U.S. central bankers’ speeches extracted with FinBERT, a domain-specific large language model, on inflation expectations among market participants across business cycle phases. Our analysis shows that communication tone has asymmetric effects depending on the state of the economy. During expansions, a positive tone raises inflation expectations, whereas during downturns its effects are muted, consistent with evidence that households respond primarily to Delphic signals, informational updates about future inflation, rather than to Odyssean signals that convey policy commitments. We also find that an asset purchase shock significantly influences inflation expectations, while other monetary policy measures do not. Overall, our results suggest that the tone of central bank communications, including speeches by central bank officials beyond those of the Federal Reserve Bank chair alone, can serve as a potent policy instrument, particularly in shaping expectations during expansions.