Words Speak as Loudly as Actions: Central Bank Communication and the Response of Equity Prices to Macroeconomic Announcements

While the literature has already widely documented the effects of macroeconomic news announcements on asset prices, as well as their asymmetric impact during good and bad times, we focus on the reaction to news based on the description of the state of the economy as painted by the Federal Open Market Committee (FOMC) statements. We develop a novel FOMC sentiment index using textual analysis techniques, and find that news has a bigger (smaller) effect on equity prices during bad (good) times as described by the FOMC sentiment index. Our analysis suggests that the FOMC sentiment index offers a reading on current and future macroeconomic conditions that will affect the probability of a change in interest rates, and the reaction of equity prices to news depends on the FOMC sentiment index which is one of the best predictors of this probability.

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The Effect of FOMC Votes on Financial Markets

Review of Economics and Statistics ◽

10.1162/rest_a_00770 ◽

2019 ◽

Vol 101 (5) ◽

pp. 921-932

Author(s):

Carlos Madeira ◽

João Madeira

Keyword(s):

Monetary Policy ◽

Financial Crisis ◽

Financial Markets ◽

Interest Rates ◽

Stock Prices ◽

Open Market ◽

Federal Open Market Committee ◽

2008 Financial Crisis ◽

Treasury Securities ◽

Stock Market Reaction

This paper shows that since votes of members of the Federal Open Market Committee have been included in press statements, stock prices increase after the announcement when votes are unanimous but fall when dissent (which typically is due to preference for higher interest rates) occurs. This pattern started prior to the 2007–2008 financial crisis. The differences in stock market reaction between unanimity and dissent remain, even controlling for the stance of monetary policy and consecutive dissent. Statement semantics also do not seem to explain the documented effect. We find no differences between unanimity and dissent with respect to impact on market risk and Treasury securities.

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Words Speak as Loudly as Actions: Central Bank Communication and the Response of Equity Prices to Macroeconomic Announcements

SSRN Electronic Journal ◽

10.2139/ssrn.3779899 ◽

2021 ◽

Author(s):

Ben Gardner ◽

Chiara Scotti ◽

Clara Vega

Keyword(s):

Central Bank ◽

Equity Prices ◽

Central Bank Communication ◽

Macroeconomic Announcements

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The influence of central bank monetary policy announcements on cryptocurrency return volatility

Investment Management and Financial Innovations ◽

10.21511/imfi.14(4).2017.07 ◽

2017 ◽

Vol 14 (4) ◽

pp. 60-72 ◽

Cited By ~ 20

Author(s):

Shaen Corbet ◽

Grace McHugh ◽

Andrew Meegan

Keyword(s):

United States ◽

Monetary Policy ◽

Interest Rates ◽

The United States ◽

Open Market ◽

Estimation Model ◽

Federal Open Market Committee ◽

International Currencies ◽

Asset Class ◽

International Monetary Policy

The emergence of Bitcoin in 2009 has received considerable attention surrounding the validity of cryptocurrencies as a viable and, in some jurisdictions, a legal currency alternative. Despite widespread concern that these cryptocurrencies are fostering the environment within which a substantial bubble can occur, it is important to analyze whether these new assets are behaving similarly to major international currencies. This paper investigates the effects of international monetary policy changes on bitcoin returns using a GARCH (1.1) estimation model. The results indicate that monetary policy decisions based on interest rates taken by the Federal Open Market Committee in the United States significantly impact upon bitcoin returns. After controlling for international effects, we find significant evidence of volatility effects driven by United States, European Union, United Kingdom and Japanese quantitative easing announcements. These results show that, despite its nature and ideals, bitcoin seems to be subject to the same economic factors as traditional fiat currencies, and is not entirely unaffected by government policies. This result has implications for investors using bitcoin as a hedging or diversification tool. In addition, we contribute to the existing debate regarding the classification of bitcoin as an asset class, by illustrating that bitcoin volatility exhibits various reactions that bear resemblance to both currency pairs and store-of-value assets.

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Crafting Consensus

Crafting Consensus ◽

10.1093/oso/9780190499488.003.0001 ◽

2020 ◽

pp. 1-18

Author(s):

Nicole Baerg

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Information Aggregation ◽

Policy Statement ◽

Single Individual ◽

Open Market ◽

Federal Open Market Committee ◽

Policy Makers ◽

Monetary Policy Committee ◽

Central Bankers

This chapter introduces central bankers as “wordsmiths,” skilled users of words, who work together to construct and edit a monetary policy statement with an intention to drive the economy by shaping the public’s beliefs about the future. The chapter starts off showing that central bankers can be both relatively vague and relatively precise with the language that they use. Baerg highlights previous explanations on the benefits of delegating monetary policy to a monetary policy committee rather than to a single individual. Known benefits include better information aggregation and problem-solving. The author introduces the argument that monetary policy committees that have diverse policy preferences are more likely to be precise and illustrates, using examples from Federal Open Market Committee (FOMC) transcript data, how policy makers bargain over the policy statement in ways similar to how they negotiate changes in interest rates. The chapter concludes with a brief overview of the structure of the manuscript.

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Monetary Policy Tightening and Long-Term Interest Rates

Economic Commentary (Federal Reserve Bank of Cleveland) ◽

10.26509/frbc-ec-201308 ◽

2013 ◽

pp. 1-6

Author(s):

Pedro Amaral

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Financial Market ◽

Policy Tools ◽

Open Market ◽

Federal Open Market Committee ◽

Market Participants ◽

Economic Developments

The Federal Open Market Committee (FOMC) has maintained an accommodative monetary policy ever since the 2007 recession, and some financial market participants are concerned that long-term interest rates may increase more than should be expected when the Committee starts to tighten. But a look at five historical episodes of monetary policy tightening suggests that such an outcome is more likely when markets are surprised by policy actions or economic developments. Given the Fed's new policy tools, especially its evolution toward more transparent communications, the odds of a surprise are far less likely now.

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