Can ChatGPT decode what the Federal Reserve is saying?
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Can ChatGPT decode what the Federal Reserve is saying?
When Federal Reserve Chair Jerome Powell holds a press conference, economists, investors and the media hang on to every word he says, trying to figure out what his words mean for the future of interest rate hikes and the economy.
His words have the power to move markets.
The stakes have been especially high this past year, as the Fed has continuously raised rates to tame inflation, which reached a 40-year high in June 2022. At its meeting this week, the Fed again raised its benchmark interest rate by a quarter percentage point. These hikes have impacted regular consumers in the form of more expensive auto loans and higher mortgage rates.
But at these meetings, some of the lingo that the Fed uses can be difficult to parse for people who aren’t familiar with the central bank. Phrases like “policy firming,” “softening of labor market conditions” and “below trend growth” add up to a lot of jargon.
John Dickerson, anchor for CBS News Prime Time, recently put ChatGPT to the test, asking the AI language model if it could clean up a statement from the Fed about its future actions.
That inspired us to find out how ChatGPT would paraphrase some of the other statements Powell made at Wednesday’s press conference, so we ran some of them through the chatbot service. Like Dickerson, we asked it to rewrite what Powell said using as plain language as possible.
We also got an expert — Francesco D’Acunto, an associate professor of finance at Georgetown University’s McDonough School of Business — to judge the responses we got from the platform.
What will the Fed do next?
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
“The Federal Reserve is trying to figure out if they need to take more action to bring the cost of things back to normal. They will think about how much they have already tried to make prices go down, how long it takes for their actions to work, and what is happening in the economy and financial world.”
This is the statement that Dickerson fed to ChatGPT. D’Acunto gave this explanation his stamp of approval, and said it’s an accurate assessment of what Powell said.
But there was another statement in this paragraph that we wanted ChatGPT to break down further.
“cumulative tightening of monetary policy”
“‘Cumulative tightening of monetary policy’ refers to the overall increase in interest rates and other policies the Federal Reserve has implemented to slow down the economy and control inflation.”
The Fed tends to liken its actions to something like a screwdriver, where it loves using verbs like “tightening” or “loosening.” Which makes sense, since the Fed explicitly refers to the measures it takes as “tools.”
The first sentence ChatGPT came up with, great. But the second part is where things get iffier. ChatGPT starts to introduce its own interpretation of what the Fed wants to do (i.e. slow down the economy).
D’Acunto said this is debatable, since we don’t necessarily need the economy to slow down or a recession for inflation to drop.
“The Fed only wants to control inflation,” D’Acunto said.
D’Acunto said the Fed wants to make it a bit costlier for people to buy houses or cars by raising interest rates (since raising the federal funds rate tends to lead to higher mortgage and auto loan rates). But the economy can still be strong even if households purchase fewer cars or houses.
“It seems like ChatGPT is trying to force a judgment on why the Fed is doing something, which potentially goes above and beyond what the Fed really means,” he said.
To be fair, experts have said that continued interest rate hikes from the Fed will likely lead to a recession, with history showing us that recessions have followed previous rate hikes in the U.S.
But Powell has previously come out and said that this is not the Fed’s goal, while Philip Jefferson, a member of the Fed’s Board of Governors, said history is less reliable this time around given the unprecedented nature of the COVID-19 pandemic.
“It’s not necessarily the case that in order for inflation to go down you need a recession, you need jobless people, and so on and so forth,” D’Acunto said. “This could be potentially a side effect of increasing interest rates. But it’s also potentially plausible that we can get inflation numbers to go down without inducing a recession.”
What are the Fed’s goals?
“From the perspective of monetary policy, our focus remains squarely on our dual mandate to promote maximum employment and stable prices for the American people.”
“The Federal Reserve is mainly concerned with two things: making sure as many people as possible have jobs and keeping prices stable.”
D’Acunto thinks ChatGPT explains the Federal Reserve’s two primary goals accurately, and is showcasing one of its main strengths: providing straightforward definitions for terms or phrases.
What’s the Fed saying about the labor market?
“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.”
“To make sure prices don’t go up too much, we might have to have a little bit of slower growth and not as many job opportunities. We need to get prices stable first so that we can have a good balance of jobs and prices in the future.”
D’Acunto said he thinks that the nuance in the phrase “slower growth” is fairer compared to “slow down the economy,” the earlier phrase ChatGPT used, since slow growth still implies some degree of positive growth.
But he disagrees with ChatGPT’s choice to translate “softening of labor market conditions” into “not as many job opportunities.”
There could still be a scenario where there are new job openings, but the wages of those jobs aren’t growing faster than inflation, said D’Acunto, which he thinks the Fed would welcome.
At a press conference late last year, Powell said the Fed does “want strong wage increases” but it wants them to be “consistent with 2% inflation.”
But some investors or other experts might agree with ChatGPT’s assessment. David Rubenstein, co-founder of the private equity firm the Carlyle Group, told CNN he thinks the Fed wants the unemployment rate to go up, it’s just that Powell can’t explicitly say it out loud.
How the Fed makes decisions
“Since early last year, we have raised interest rates by a total of 5 percentage points in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. We are also continuing to reduce our securities holdings. Looking ahead, we will take a data-dependent approach in determining the extent to which additional policy firming may be appropriate.”
“Since last year, we’ve made borrowing money more expensive by increasing interest rates by 5%. We did this so that inflation goes back to 2% over time. We’re also selling off some of the investments we own. Moving forward, we’ll keep an eye on the situation and make decisions about whether to make more changes based on how things are going.”
D’Acunto here took issue with how ChatGPT paraphrased “data-dependent approach” to mean “keep an eye on the situation,” which is a generic, vague phrase. If you’re an investor, you’d be uncertain about how the Fed makes decisions.
What the Fed is specifically saying here is that it’s going to look at data to make its decision, which includes the rate of core inflation: the price of goods and services excluding food and energy, whose prices are volatile. The Fed also pays attention to inflation expectations from experts and consumers, along with job and employment-related data from the Bureau of Labor Statistics, explained D’Acunto.
He said the Fed is not, on the other hand, going to look at international conflicts like the Russia-Ukraine war and speculate whether it will impact prices.
Takeaways from ChatGPT
Overall, D’Acunto said that ChatGPT is a great resource when you need a quick definition for a technical phrase. But problems may arise when you need sophisticated interpretations.
“Once we ask ChatGPT to interpret either what the Fed is doing, or the implications of the Fed’s actions … I think that, unfortunately, ChatGPT portrays a very limited set of answers, which don’t really show the full picture, and therefore can be misleading,” D’Acunto said.
While it can be difficult to parse what the Fed is saying at times, the central bank uses precise wording for good reason. As is the case in any translation, you can make someone’s words more comprehensible, but at risk of losing the original meaning.
“The Fed uses very precise lingo because it wants to be crystal clear, and avoid any uncertainty in the way in which market participants might understand their sentences. The problem of paraphrasing is that on some occasions, it actually does introduce more uncertainty,” he said.
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