"FOMC Minutes Sentiment Surprises and their Impact on Financial Markets"

Since 2005, the Federal Open Market Committee (FOMC) has regularly released its minutes three weeks after its meetings. Previous research has found that the volatility of different financial market returns reacts to these releases, and the nature of the market reactions may depend on the information the minutes contain. In this paper, I use Automated Content Analysis to systematically evaluate the meeting documents and create sentiment indices that proxy for the policy tilt of the FOMC discussions. I compare the sentiment index of the discussions in the minutes to the sentiment index of the information in their corresponding FOMC statements and calculate the surprise component of the minutes' sentiments. Using high-frequency data, I then examine how these surprises, which I refer to as news shocks, impact financial markets immediately after their release. In particular, I evaluate the impact of news shocks on broad equity and real estate investment trust indices, as well as the exchange rate valuation of several major currencies against the U.S. Dollar. My findings indicate that financial assets respond to the minutes based on the type of news shock they contain, and that these reactions became significant after the FOMC implemented its date-based policy commitment period.

Link to the paper

"Forward – Looking Monetary Policy and the Contributions of Public Expectations"

The staff of the Federal Reserve Board of Governors uses a significant amount of resources to obtain forecasts of macroeconomic conditions. The Federal Open Market Committee (FOMC) members receive these forecasts shortly before their scheduled monetary policy meetings, but only makes these forecasts available to the public after a five year lag. Despite the resources used to create them, the staff forecasts may not necessarily represent all of the relevant economic information considered when making monetary policy decisions. Hence, I analyze publicly available forecast information, which is created independently of staff forecasts and is proxied by the Survey of Professional Forecasters. I examine whether these widely available forecasts represent information that affect FOMC decision-making, or if the policy decisions depend solely on the private information of the FOMC. Moreover, I use Automated Content Analysis to decipher the sentiments of the information in the FOMC meeting statements and then evaluate the type of forecasts reflected in these statements. I find that a combination of publicly available inflation projections and contemporaneous staff forecasts of unemployment best portrays macroeconomic information that affects policy decisions. In contrast, sentiments obtained from the information in the FOMC statements are largely consistent with the staff projections.

"Monetary Policy Effects on the Chilean Stock Market: An Automated Content Approach" (Work with Mario Gonzalez)

The latest financial crisis has increased the interest in understanding how monetary policy  announcements impact financial markets. For the US there are several studies that cover this area of research, however, for emerging markets the number of studies is scarce. This paper studies how the Chilean stock market is affected by monetary policy announcements made by the Central Bank of Chile. In their monthly monetary policy meetings the Central Bank of Chile decides the monetary policy rate and circulates press releases that effectively explains their decision. The information contained in this document includes policy decisions for the current month, the central bank’s economic outlook, and the signals about likely future central bank policy decisions. We therefore examine these monetary policy changes and the corresponding additional information from the meeting statements. Using Automated Content Analysis, we identify the qualitative information from the statement releases of the Central Bank of Chile and create a quantitative measure for the signals indicating likely future monetary policy. This quantitative measure, which we call sentiment score - proxies for the monetary policy tilt. We then evaluate how the surprise component of the sentiment scores – together with unexpected policy changes - impact Chilean financial assets.