FOMC Communication and Interest Rate Sensitivity to News
As central banks make an increasingly greater effort to inform the public about their objectives and operations, it’s important to gain a better understanding of how financial markets could glean information about policy reaction functions from the banks’ communications.
Central bank communications involving forward guidance have received the most attention, because, many studies have shown, they can stimulate demand when nominal interest rates are close to zero, as they have been recently for many advanced economies. Likewise, much of the empirical work on central bank communications has focused on their effect on the level of interest rate expectations.
Less attention has been paid to central bank communications’ ability to convey information about policy reaction functions. This paper takes a step in that direction by exploring the relationship between the language used in communications by the Federal Reserve Open Market Committee (FOMC) and financial market responses to different types of macroeconomic news. Specifically, the author looks at whether the emphasis on the topic of labor in FOMC meeting minutes and post-meeting statements is associated with stronger responses of interest rates to labor-related news. A positive relationship would suggest that FOMC communications could play a role in determining the types of macroeconomic news that the financial markets pay attention to.