An Evaluation of the Asymmetric Impacts of Communication by the Federal Reserve

Abstract This paper explores the impact of communications by the Federal Reserve on financial market returns before and after the financial crisis. It specifically looks at whether markets' responses to communication differ depending on the source and depending on whether the tone is positive or negative. I extract the tone used in communications by using tools from computational linguistics to create a measure based on the number of positive and negative words appearing in a communication. Using this measurement for tone, I find that market returns respond more to the tone of communications after the financial crisis. Second, I find the tone used by the chairperson has a greater impact than the tone of other individuals. Finally, I find that stock market returns react positively to positive and negative statements after the financial crisis, which implies language suggesting a rate increase is ignored by markets once the zero-lower bound was reached.