It Is Not Just What You Say, but How You Say It: Why Tonality Matters in Central Bank Communication

Abstract

This paper investigates the stock market reaction to the tone of central bank communication. We use textual analysis techniques to measure the tonality of the FOMC minutes’ text and show that a more optimistic tonality has a positive impact on stock returns. This positive effect is prevalent during times of high monetary policy uncertainty and comes mainly from the effect tonality has on risk premium and growth expectations. Our results show that the FOMC minutes are an effective central bank communication tool, particularly during times of high policy uncertainty.

Keywords: FOMC Minutes; Monetary Policy; Textual Analysis; Stock Returns; Tonality; Intraday data

JEL Classification: G10, G12, G13, G14