Disagreement Among FOMC Members and Asset Prices

Abstract

In recent years, central banks have focused on communication with financial markets, and have tended to conduct policy with high transparency in order to further enhance the effectiveness of monetary policy. In this research, we focus on the members of the U.S. Federal Open Market Committee (FOMC) which determines monetary policy and try to analyze how their disagreement affect investors’ behavior based on the announcements of macroeconomic indicators. In order to quantify disagreement among FOMC members, we collect text data on speeches by FOMC members and quantify them by applying text mining techniques. We then define disagreement among FOMC members through the dispersion of the quantified sentiments. Swanson and Williams (2014) show that investor response to the surprising announcements of macroeconomic indicators weakens under the zero interest rate constraint. In this research, consistent with Detmers (2016), we indicate that (1) investors’ response to surprising announcements of macroeconomic indicators weakens under forward guidance, (2) when disagreement among FOMC members is high, investors again react strongly to the announcements, and (3) investors are more aware of disagreement among members with voting rights than members who do not have at the FOMC meeting. Thus, disagreement, especially among members with voting rights, appears to lower the effectiveness of forward guidance to weaken the Fed’s commitment as perceived by investors, and to lead investors to be sensitive to the announcements of macroeconomic indicators.