Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements

Abstract

We present a new automated, objective and intuitive scoring method to measure the content of central bank communication about future policy rate moves. We apply the methodology to statements released by the Federal Open Market Committee (FOMC) after monetary policy meetings. Using intra-day financial data, we find that short-term nominal yields on Treasury securities respond to changes both in policy rates and the content of the statement. By contrast, mediumand long-term yields only react to changes in communication. Using lower frequency data, we find that changes in the content of the statements lead policy rate moves by about six months both in univariate and vector autoregression models. These results are consistent with the view that the FOMC releases information about future policy actions in the statement and market participants include this information when pricing medium- and long-term securities. The paper discusses the interplay between central bank communication and policy rate moves.