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Keywords: state-based forward guidance, text analysis
The state-based forward guidance on the interest rate is often touted as allowing the private sector to adjust the expected policy stance automatically in response to economic news. However, implicit in this view is the assumption that the policymakers can commit to their promised policy actions tied with economic conditions. If policymakers change the way that they discuss the economic outlook after introducing the state-based forward guidance and the market participants adjust their behavior following policymakers' communications on the economic outlook, the fi nancial market will respond to economic news in a way that is not fully compatible with the original intention of the forward guidance. We use the forward guidance based on in inflation and unemployment thresholds introduced in the December 2012 FOMC meeting as a testing example by identifying the policymakers' speech tone about the outlook using text-analysis. Our results show that policymakers downplayed the signi ficance of the fast decline in the unemployment rate when it approached the threshold earlier than expected. In addition, financial markets became more sensitive to the policy shock component of economic news rather than the growth shock component. Our findings highlight challenges in designing the effective state-based forward guidance and suggest a caution in providing "too precise information" in forward guidance.