Federal Reserve Communication and the COVID-19 Pandemic
Have the content, sentiment, and timing of the Federal Reserve (Fed) communications changed across communication types during the COVID-19 pandemic? Did similar changes occur during the global financial and dot-com crises? We compile dictionaries specific to COVID-19 and unconventional monetary policy (UMP) and utilize sentiment analysis and topic modeling (LDA) to study the Fed’s communications and answer the above questions. We show that the Fed’s communications regarding the COVID-19 pandemic concern matters of financial volatility, contextual uncertainty, and financial stability, and that they emphasize health, social welfare, and UMP. We also show that the Fed’s communication policy changes drastically during the COVID-19 pandemic compared to the GFC and dot-com crisis in terms of content, sentiment, and timing. Specifically, we find that during the past two decades, a decrease in the financial stability sentiment conveyed by the Fed’s interest rate announcements and minutes precedes a decrease in the Fed’s interest rate.