Tracing the Spread of Inflation Narratives: The Transmission of FOMC Communication to Household Expectations via the Media

Title: Tracing the Spread of Inflation Narratives: The Transmission of FOMC Communication to Household Expectations via the Media 

Abstract: Households know little about central banking, yet research shows that they adjust their expectations around monetary policy announcements. We address this puzzle by showing that Federal Reserve inflation narratives – causal explanations for rising inflation articulated in Federal Open Market Committee (FOMC) communications – are transmitted to households via the media, thereby influencing how they form expectations. Using hand- annotated FOMC press conference transcripts, we evaluate large language models (LLM) in their capability to identify inflation narratives. We then link these narratives to contemporaneous New York Times coverage and household expectation data to trace how FOMC communication shapes household expectations. By employing an event-study IV approach, we exploit shifts in FOMC narrative emphasis to instrument high-frequency variation in media coverage. Each additional FOMC inflation narrative raises household inflation expectations by about half a percentage point through the media channel. The effect is concentrated among financially literate university graduates.