The Effects of the Content of FOMC Communications on US Treasury Rates

Abstract

This study measures the effects of Federal Open Market Committee text content on the direction of short-and medium-term interest rate movements. Because the words relevant to short-and medium-term interest rates differ, we apply a supervised approach to learn distinct sets of topics for each dependent variable being examined. We generate predictions with and without controlling for factors relevant to interest rate movements, and our prediction results average across multiple training-test splits. Using data from 1999-2016, we achieve 93% and 64% accuracy in predicting Target and Effective Federal Funds Rate movements and 38%-40% accuracy in predicting longer term Treasury Rate movements. We obtain lower but comparable accuracies after controlling for other macroeconomic and market factors.

Measure Country-Level Socio-Economic Indicators with Streaming News: An Empirical Study

“…Furthermore, EPU uses the aggregated sentiment (by counting the number of times people expressed their views on economic policy uncertainty) as the measure, but we use a more objective approach which measures events that are correlated to the uncertainty. (Rohlfs et al, 2016) applied supervised topic modeling to measure the effects of Federal Open Market Committee text content on the direction of short-and medium-term interest rate movements.…”