Fed Communication, News, and Disagreement

Abstract

We estimate monetary policy sentiment from the perspective of two different sources: direct central bank communication (FOMC statements and press conferences), and the media (Dow Jones newswire articles) during FOMC announcement days. Textual sentiment across the two sources is highly correlated, but there are times when media sentiment substantially disagrees with the sentiment conveyed by the central bank. We find that media sentiment has a higher correlation with daily U.S. Treasury yield changes than the sentiment extracted directly from Fed communication, and better predicts future revisions in economic forecasts. Media sentiment is able to predict future FOMC decisions, but not better than the FOMC direct communication itself. We investigate three mechanisms that can potentially explain what drives disagreement between the media and direct central bank communication: asymmetric information (central bank has better information than the media), the media has erroneous beliefs about the monetary policy rule, and the central bank and the media weight past public information differently. Our empirical results suggest that the latter mechanism is the most likely mechanism, and that the media puts more weight on information conveyed by past S\&P 500 returns than the central bank itself.

Keywords: Monetary policy, public information, price discovery, news, textual analysis

JEL Classification: C53, D83, E27, E37, E44, E47, E5, G1