IDEAS home Printed from https://ideas.repec.org/a/eee/jebusi/v118y2022ics0148619521000394.html
   My bibliography  Save this article

FOMC minutes sentiments and their impact on financial markets

Author

Listed:
  • Tadle, Raul Cruz

Abstract

I develop a semi-automated method that systematically evaluates the information in FOMC meeting documents. This method highlights economic conditions and calculates document sentiment indices that proxy for the FOMC's interest rate tilt. I compare the sentiment indices of FOMC minutes and their corresponding FOMC statements. Using high-frequency data, I then examine how these sentiment indices are associated with the fed funds futures contracts, broad equity, and real estate investment trust indices, and exchange rate valuation of several major currencies against the U.S. Dollar. I find that minutes sentiments have a statistically significant association with the fed funds futures rate and the U.S. dollar's valuation.

Suggested Citation

  • Tadle, Raul Cruz, 2022. "FOMC minutes sentiments and their impact on financial markets," Journal of Economics and Business, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:jebusi:v:118:y:2022:i:c:s0148619521000394
    DOI: 10.1016/j.jeconbus.2021.106021
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148619521000394
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeconbus.2021.106021?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    3. Brownlees, C.T. & Gallo, G.M., 2006. "Financial econometric analysis at ultra-high frequency: Data handling concerns," Computational Statistics & Data Analysis, Elsevier, vol. 51(4), pages 2232-2245, December.
    4. Emi Nakamura & Jón Steinsson, 2018. "High-Frequency Identification of Monetary Non-Neutrality: The Information Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(3), pages 1283-1330.
    5. Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132.
    6. Apergis, Nicholas, 2015. "The role of FOMC minutes for US asset prices before and after the 2008 crisis: Evidence from GARCH volatility modeling," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 100-107.
    7. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
    8. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 69-96, March.
    9. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    10. Michael T. Kiley, 2014. "The Response of Equity Prices to Movements in Long‐Term Interest Rates Associated with Monetary Policy Statements: Before and After the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 1057-1071, August.
    11. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    12. Gorodnichenko, Yuriy & Shapiro, Matthew D., 2007. "Monetary policy when potential output is uncertain: Understanding the growth gamble of the 1990s," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1132-1162, May.
    13. Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano & Leonardo Melosi, 2017. "Forward Guidance and Macroeconomic Outcomes since the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 283-357.
    14. Apel Mikael & Grimaldi Marianna Blix, 2014. "How Informative Are Central Bank Minutes?," Review of Economics, De Gruyter, vol. 65(1), pages 53-76, April.
    15. repec:pri:cepsud:161blinder is not listed on IDEAS
    16. Rosa, Carlo, 2011. "The high-frequency response of exchange rates to monetary policy actions and statements," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 478-489, February.
    17. Stekler, Herman & Symington, Hilary, 2016. "Evaluating qualitative forecasts: The FOMC minutes, 2006–2010," International Journal of Forecasting, Elsevier, vol. 32(2), pages 559-570.
    18. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    19. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 509-541, March.
    20. Eric T. Swanson & John C. Williams, 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates," American Economic Review, American Economic Association, vol. 104(10), pages 3154-3185, October.
    21. Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2016. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 317-356, June.
    22. Carlo Rosa, 2013. "The financial market effect of FOMC minutes," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 67-81.
    23. John B. Carlson & Ben R. Craig & Patrick C. Higgins & William R. Melick, 2006. "FOMC communications and the predictability of near-term policy decisions," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jun.
    24. El-Shagi, Makram & Jung, Alexander, 2015. "Have minutes helped markets to predict the MPC's monetary policy decisions?," European Journal of Political Economy, Elsevier, vol. 39(C), pages 222-234.
    25. Jeffrey R. Campbell & Charles L. Evans & Jonas D.M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic Effects of Federal Reserve Forward Guidance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 1-80.
    26. David O. Lucca & Emanuel Moench, 2015. "The Pre-FOMC Announcement Drift," Journal of Finance, American Finance Association, vol. 70(1), pages 329-371, February.
    27. Jubinski, Daniel & Tomljanovich, Marc, 2013. "Do FOMC minutes matter to markets? An intraday analysis of FOMC minutes releases on individual equity volatility and returns," Review of Financial Economics, Elsevier, vol. 22(3), pages 86-97.
    28. Don Bredin & Gerard O’Reilly & Simon Stevenson, 2007. "Monetary Shocks and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 315-331, October.
    29. Ed Nosal, 2001. "How well does the federal funds futures rate predict the future federal funds rate?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    30. repec:bla:jfinan:v:59:y:2004:i:3:p:1259-1294 is not listed on IDEAS
    31. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wonseong Kim & Choong Lyol Lee, 2024. "Bounded Rationality in Central Bank Communication," Papers 2411.04286, arXiv.org.
    2. Gu, Chen & Chen, Denghui & Stan, Raluca & Shen, Aizhong, 2022. "It is not just What you say, but How you say it: Why tonality matters in central bank communication," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 216-231.
    3. Aleksandra Rutkowska & Magdalena Szyszko, 2024. "Dictionary-based sentiment analysis of monetary policy communication: on the applicability of lexicons," Quality & Quantity: International Journal of Methodology, Springer, vol. 58(6), pages 5421-5444, December.
    4. Joshua Eklund & Jong‐Min Kim, 2024. "Forecasting Consumer Price Index with Federal Open Market Committee Sentiment Index," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(6), pages 1795-1813, September.
    5. Xuefan, Pan, 2023. "Analysing the response of U.S. financial market to the Federal Open Market Committee statements and minutes based on computational linguistic approaches," Warwick-Monash Economics Student Papers 43, Warwick Monash Economics Student Papers.
    6. Kaminskas, Rokas & Jurkšas, Linas, 2024. "ECB communication sentiments: How do they relate to the economic environment and financial markets?," Journal of Economics and Business, Elsevier, vol. 131(C).
    7. Linas Jurkšas & Rokas Kaminskas, 2023. "ECB monetary policy communication: does it move euro area yields?," Bank of Lithuania Discussion Paper Series 29, Bank of Lithuania.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrade, Philippe & Ferroni, Filippo, 2021. "Delphic and odyssean monetary policy shocks: Evidence from the euro area," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 816-832.
    2. Hubert, Paul & Labondance, Fabien, 2021. "The signaling effects of central bank tone," European Economic Review, Elsevier, vol. 133(C).
    3. Chen, Zhengyang, 2019. "The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission," MPRA Paper 96339, University Library of Munich, Germany.
    4. Lakdawala, Aeimit & Schaffer, Matthew, 2019. "Federal reserve private information and the stock market," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 34-49.
    5. Cieslak, Anna & Schrimpf, Andreas, 2019. "Non-monetary news in central bank communication," Journal of International Economics, Elsevier, vol. 118(C), pages 293-315.
    6. Yuriy Gorodnichenko & Tho Pham & Oleksandr Talavera, 2023. "The Voice of Monetary Policy," American Economic Review, American Economic Association, vol. 113(2), pages 548-584, February.
    7. Apergis, Nicholas, 2015. "The role of FOMC minutes for US asset prices before and after the 2008 crisis: Evidence from GARCH volatility modeling," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 100-107.
    8. Richhild Moessner, 2015. "International spillovers from US forward guidance to equity markets," Applied Economics, Taylor & Francis Journals, vol. 47(42), pages 4549-4560, September.
    9. Möller, Rouven & Reichmann, Doron, 2021. "ECB language and stock returns – A textual analysis of ECB press conferences," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 590-604.
    10. Jung, Alexander, 2023. "US monetary policy spillovers to European banks," Working Paper Series 2876, European Central Bank.
    11. Hansen, Stephen & McMahon, Michael & Tong, Matthew, 2019. "The long-run information effect of central bank communication," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 185-202.
    12. Couture, Cody, 2021. "Financial market effects of FOMC projections," Journal of Macroeconomics, Elsevier, vol. 67(C).
    13. Aeimit Lakdawala, 2019. "Decomposing the effects of monetary policy using an external instruments SVAR," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(6), pages 934-950, September.
    14. Hayo, Bernd & Henseler, Kai & Steffen Rapp, Marc & Zahner, Johannes, 2022. "Complexity of ECB communication and financial market trading," Journal of International Money and Finance, Elsevier, vol. 128(C).
    15. Kaminska, Iryna & Mumtaz, Haroon & Šustek, Roman, 2021. "Monetary policy surprises and their transmission through term premia and expected interest rates," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 48-65.
    16. Michael D Bauer & Aeimit Lakdawala & Philippe Mueller, 2022. "Market-Based Monetary Policy Uncertainty," The Economic Journal, Royal Economic Society, vol. 132(644), pages 1290-1308.
    17. Carlos Alba & Julio A. Carrillo & Raúl Ibarra, 2024. "Information Effects of US Monetary Policy Announcements on Emerging Economies: Evidence from Mexico," Working Papers 2024-14, Banco de México.
    18. Cieslak, Anna & Pang, Hao, 2021. "Common shocks in stocks and bonds," Journal of Financial Economics, Elsevier, vol. 142(2), pages 880-904.
    19. Patrick Hirsch & Lars P. Feld & Ekkehard A. Köhler, 2023. "Breaking Monetary Policy News: The Role of Mass Media Coverage of ECB Announcements for Public Inflation Expectations," CESifo Working Paper Series 10285, CESifo.
    20. Swanson, Eric T., 2021. "Measuring the effects of federal reserve forward guidance and asset purchases on financial markets," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 32-53.

    More about this item

    Keywords

    Federal Reserve; Policy documents; Sentiment analysis; Monetary policy; Asset prices; FOMC;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:118:y:2022:i:c:s0148619521000394. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-economics-and-business .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.