Question

Answer these questions:

1. What were recent monetary policy measures taken. How did the market react to it. Why?

2. What fiscal policy measures have been taken or are in the works in response to the current crisis. How has the stock market reacted to them? Why?

Answer 1

Following are the monetary policy measures taken by the us government

March 6: Trump signs $8.3 billion emergency spending package

The first major legislation intended to address COVID-19 was a financial drop in a bucket.

President Donald Trump signed the $8 billion emergency measure on the same day that worldwide cases passed 100,000, in early March. It provided funding to authorities already fighting to contain the outbreak and allocated $3 billion for vaccine research.

Support for the bill was nearly universal. Only three lawmakers voted against the bill: Reps. Ken Buck, R-Colo., and Andy Biggs, R-Ariz., and Sen. Rand Paul, R-Ky.

March 12: Fed says it will pump more than $1 trillion into financial system

The Federal Reserve announced it would inject up to $1.5 trillion into the financial system in an effort to calm the market. The move came amid liquidity concerns and initially sent markets higher, though some observers warned it would not be enough.

March 13: Trump gives people with student loans a break

Trump pledged some reprieve to student loan borrowers, saying that all interest on federal student loans would be waived for the duration of the coronavirus emergency. A week after Trump's promise, though, borrowers said that interest was still being charged. A spokesman for the Department of Education said interest added after Trump's announcement will be eliminated retroactively.

March 13: Trump declares national emergency

Trump originally resisted declaring a national emergency over coronavirus, fearing the move would spook financial markets. But when he did so, the major indexes rallied, posting their largest single-day gain since October 2008.

The move freed up to $50 billion in financial resources to assist Americans affected by the outbreak.

Health and Human Services Secretary Alex Azar had declared a nationwide public health emergency, a step short of a national emergency, over the coronavirus in January.

March 15: Fed cuts rates to zero, launches $700 billion quantitative easing program

The Fed's first dramatic action, reminiscent of the 2008 financial crisis, came on a Sunday evening: The central bank cut rates to nearly zero and announced a $700 billion quantitative easing program.

The Fed said its purchases would include $500 billion of Treasurys and $200 billion of agency-backed mortgage securities. The central bank later said it would also buy municipal bonds.

Chairman Jerome Powell said at the time that the near-zero benchmark interest rate would remain "until we're confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals."

March 17: Fed takes new steps to keep money flowing

The central bank took big steps to keep money flowing in the U.S. economy: It established a Primary Dealer Credit Facility, which provides short-term funding to big financial firms, and a Commercial Paper Funding Facility to purchase corporate paper from issuers.

The Primary Dealer Credit Facility targets the nation's 24 largest institutions that buy government securities directly, while the latter is geared toward supporting the flow of credit to households and businesses.The Commercial Paper Funding Facility could total $1 trillion, Treasury Secretary Steven Mnuchin said.

Second Quarter 2019,

Vol. 101, No. 2

Posted 2019-04-15

Gauging Market Responses to Monetary Policy Communication

by Kevin L. Kliesen, Brian Levine, and Christopher J. Waller

Posted 2/14/2019

Abstract: The modern model of central bank communication suggests that central bankers prefer to err on the side of saying too much rather than too little. The reason is that most central bankers believe that clear and concise communication of monetary policy helps achieve their goals. For the Federal Reserve, this means to achieve its goals of price stability, maximum employment, and stable long-term interest rates. This article examines the various dimensions of Fed communication with the public and financial markets and how Fed communication with the public has evolved over time. We use daily and intraday data to document how Fed communication affects key financial market variables. We find that Fed communication is associated with changes in prices of financial market instruments such as Treasury securities and equity prices. However, this effect varies by type of communication, by type of instrument, and by who is doing the speaking.

KEYNES: Arising from Professor Gregory's questions, is it a practice of the Bank of England never to explain what its policy is?

HARVEY: Well, I think it has been our practice to leave our actions to explain our policy.

KEYNES: Or the reasons for its policy?

HARVEY: It is a dangerous thing to start to give reasons.

KEYNES: Or to defend itself against criticism?

HARVEY: As regards criticism, I am afraid, though the Committee may not all agree, we do not admit there is a need for defence; to defend ourselves is somewhat akin to a lady starting to defend her virtue.

Exchange between John Maynard Keynes and Bank of England Deputy Governor Sir Ernest Harvey, December 5, 1929.1

INTRODUCTION

Central bank communication has come a long way since the Bank of England's motto ostensibly was "Never explain, never apologize."2 Today, the motto of central bankers might instead be "Can you hear me now?" The modern model of central bank communication suggests that central bankers prefer to err on the side of saying too much rather than too little. In this vein, central bank communication takes many forms, from economic forecasts and official reports, to speeches, interviews, testimonies before governmental bodies, and policy statements and press conferences immediately after policy meetings. In the United States, enhancements in central bank communication are most pronounced in the realm of speeches and other remarks (e.g., television interviews) by Federal Reserve (hereafter, Fed) governors and Reserve Bank presidents. These forms of communication have become more prominent since the recession and Financial Crisis. In an era of increased communication by Federal Open Market Committee (FOMC) participants, one may ask whether additional information is useful for financial market participants who carefully monitor monetary policy developments. Indeed, some economists and analysts have argued that Fed officials talk too much.3 There are many nuances to this argument, but the primary claim is that more information increases the probability of market mispricing. Shin (2017) discusses some of these issues.

There are at least two counterarguments to the market mispricing view. The first, as enunciated by Kocherlakota (2017), is that the price of an independent central bank is a set of independent voices to insure against group think. The second counterargument is that the pricing of financial instruments in markets is more efficient with more, not less, information. Regardless, central bank communication is important because individuals' economic decisions are based on expectations of future policies. Thus, clear communication of its policies and actions may help the Fed achieve its mandated goals of stable prices, maximum employment, and moderate long-term interest rates.

The purpose of this article is twofold. The first part examines the various dimensions of Fed communication with the public and financial markets. This includes documenting how communication with the public has evolved over time. The second part empirically analyzes the economic effects of Fed communication on key financial market variables. Our analysis uses daily and intraday data. We find that Fed communication can affect prices of financial market instruments such as equities and Treasury securities. However, this effect varies by type of communication, by type of instrument, and by who is doing the speaking. We also find that larger financial market reactions tend to be associated with communication from the Fed Chair, non-Chair Fed governors, and FOMC meetings without an associated press conference. We further find that financial market reactions following press conferences after FOMC meeting statements are not significant.

HOW DOES THE FED COMMUNICATE?

As the exchange between John Maynard Keynes and Bank of England Deputy Governor Sir Ernest Harvey demonstrated, the principles of central bank communication have evolved over time. A modern comparison describing the evolution of Fed communication was noted in 2003 by then Fed Governor Janet Yellen when she said that the FOMC "had journeyed from 'never explain' to a point where sometimes the explanation is the policy."4 Some have termed this policy "open-mouth operations."5 Although views may differ between policymakers and across central banks, the fundamental principles of central bank communication are founded on the dual notions that increased transparency enhances the effectiveness of policy and the accountability of policymakers in a democratic society.6 In this article, we focus on Fed communication, though the principles and practices are similar among many of the world's central banks.

When analyzing central bank communication, the following questions come to mind: First, who should do the talking; second, what should the central bank talk about; and, third, who should the central bank talk to? There is a vast economic literature that attempts to answer these questions. One notable early effort was a cross-country study by Blinder et al. (2001), who surveyed communication methods and tactics, among other things. A subsequent article by Blinder et al. (2008) argued that there was large variation in strategies but no consensus on the best-practice approach to communicating monetary policy to the public. Woodford (2001) was an early proponent of using communication to influence market expectations. This view influenced several subsequent Fed officials, most notably former Fed Chairman Ben Bernanke.7 Finally, in the aftermath of the Financial Crisis of 2008, several event studies were published that analyzed the FOMC's unconventional policy actions on prices of financial market instruments, macroeconomic outcomes, and the expectations about future monetary policy actions.8

In sum, the academic literature offers more support for the modern view of central bank communication: More is generally better. Table 1 lists the primary methods that the Fed uses to communicate its policies, procedures, and policy expectations to the public.9 These methods include the policy statement released at the end of each regularly scheduled FOMC meeting, the minutes released three weeks after each of the eight regularly scheduled FOMC meetings, the Chair's quarterly press conference, along with speeches, testimonies, and media interviews by Fed governors and Reserve Bank presidents. Some of these innovations are long standing, such as the FOMC minutes, while others are more recent, such as the Chair's quarterly press conference.10 Given the prominence of FOMC policy statements as a communication instrument, the following discussion will first briefly focus on their history and role.

Policy Statements: Length and Readability

The Fed's principle medium of communication is the policy statement released after each FOMC meeting. The policy statement has evolved over time. From 1967 to 1992, the FOMC issued a "Record of Policy Actions" (ROPA), which were initially released with a 90-day lag.11 Beginning under Chairman Alan Greenspan, the FOMC began to issue policy statements immediately after the February 4, 1994, meeting. The first policy statement was rather short, at 99 words, and made no mention of the intended federal funds target rate. Instead, the inaugural statement indicated that the Committee decided to "increase slightly the degree of pressure on reserve positions" in financial markets. In taking this action, the FOMC noted that they expected an "associated small increase in short-term money market interest rates."12

Following the release of the inaugural statement, the FOMC released a post-meeting statement four additional times in 1994. Three post-meeting statements were released in 1995, including the statement released after the July 6, 1995, meeting, which was the first instance that the FOMC specifically mentioned the federal funds rate. The FOMC continued to issue post-meeting statements over the next few years, but only at meetings where a policy change occurred. However, beginning with the May 18, 1999, meeting, statements were released after each FOMC meeting.13 The public focus on the policy statement was such that the financial press developed a "briefcase barometer."14

The post-meeting FOMC statements have evolved over time. Prior to the Financial Crisis, the post-meeting policy statement mostly focused on the state of the economy and the Committee's rationale for raising or lowering the policy rate or reasons why the policy rate was not changed. In general, less was said about the future path of interest rate changes. The policy statement evolved to take on a larger role in communicating the stance of monetary policy during the Financial Crisis after the federal funds rate reached the zero lower bound (ZLB) on December 16, 2008.15 Figure 1 shows that the word count of the policy statements began to increase steadily in 2007 during the early stages of the Financial Crisis. The word count continued to increase during the adoption of quantitative easing (QE) policies that both increased the size of the balance sheet and changed its composition. Prior to the ZLB period, the number of words in each statement averaged 223. During the ZLB period, the count was more than twice as much, averaging 580 words.

Figure 1: FOMC Statement Word Count

NOTE: Shaded area indicates the period of the FOMC's unconventional monetary policy with interest rates at the effective ZLB. MEP, Maturity Extension Program. Under the MEP, the Fed sold or redeemed shorter-term Treasury securities and used the proceeds to buy longer-term Treasury securities, thereby extending the average maturity of the securities in the Fed's portfolio. Updated through 2017.

SOURCE: Board of Governors of the Federal Reserve System.

After the nominal federal funds target rate reached the ZLB in December 2008, the Fed provided the largest amount of monetary accommodation through balance sheet adjustments and other unconventional policies.16 But as the U.S. economy transitioned from recession to a slower-than-average recovery, the Fed's policy approach also changed. The new approach focused instead on influencing the public's expectations of the future direction and level of the federal funds target rate. This approach, in its current form, is referred to as forward guidance.17 For example, following the August 9, 2011, meeting, the policy statement stated the following:

The Committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

In this case, the FOMC's intent was to signal to the public that its policy rate would remain low for a long time in order to spur the economy's recovery. This signal was meant to be taken as a public commitment, what Campbell et al. (2012) termed "Odyssean" policy. Using language from Greek mythology, Odyssean policy is meant to convey a public commitment not to change policy for a certain period—in this case, for more than two years. Instead, the public appeared to view this statement as a forecast, what Campbell et al. (2012) termed "Delphic" policy. In effect, the Delphic statement strongly suggested that, in the FOMC's view, the economic weakness would persist for more than two years. However, at the June 2011 meeting two months earlier, the Summary of Economic Projections (SEP) indicated that real gross domestic product (GDP) would increase by 3.5 percent in 2012 and by 3.9 percent in 2013 (each measure is the midpoint of the central tendency).18 Thus, by August, the Committee appeared to have concluded that it, like most private sector forecasters, had been much too optimistic about the pace of real GDP growth during the early stages of the expansion. Indeed, by the January 2012 meeting, forecasts for real GDP growth in 2012 and 2013 had been marked down to 1.7 percent and 2.5 percent, respectively.

Figure 2: FOMC Statement Complexity

NOTE: Shaded area indicates the period of the FOMC's unconventional monetary policy with interest rates at the effective ZLB. MEP, Maturity Extension Program. Under the MEP, the Fed sold or redeemed shorter-term Treasury securities and used the proceeds to buy longer-term Treasury securities, thereby extending the average maturity of the securities in the Fed's portfolio. Updated through December 2017.

SOURCE: Board of Governors of the Federal Reserve System (FOMC statements) and Educational Testing Service (word count).

To accomplish the Fed's goals and objectives in a slow-growth economy, the post-meeting statement changed in two dimensions. The first change, as noted above, was that the length increased. The statements included more discussion of the economic situation and its implication for the near-term direction of policy (changes in the federal funds target rate).19 Second, the statements incorporated more complex economic terms and analysis. This is shown in Figure 2, which uses text evaluation software to measure the Flesch-Kincaid reading grade level of the policy statement. A higher grade level is assumed to reflect increased complexity of the statement. Prior to the ZLB period, the median grade level was 13.5, indicating comprehension accessible to someone reading at a college undergraduate level. But by late 2013, when the FOMC was in the midst of increasing the size of its balance sheet through asset purchases, the grading level rose to 20, which is commensurate to a graduate school reading level. For the entire ZLB period, the grade level rose to 16 (median), but then fell to 15 (median) during the post-ZLB period.20 Researchers find that the readability of central bank policy statements and remarks are an important factor in how they are received by financial markets. Not surprisingly, clearer statements lead to lower volatility.21

This section has highlighted how the FOMC changed the length and composition of the policy statement during the period of unconventional monetary policy. But the policy statement is only one form of central bank communication. Speeches and other public remarks are another form of communication that policymakers have deployed to increase the public's knowledge of the prevailing monetary policy regime. The next two sections will delve into monetary policy communication strategies by Fed officials, both old and new.

Public Remarks by Fed Officials

Fed officials have long used other forms of public communication besides policy statements.22 Public remarks can take many forms, including formal speeches, Congressional testimonies, interviews with the financial media, or published articles and commentaries. Sometimes, Fed officials do not comment on monetary policy issues that may be discussed at recent or upcoming FOMC meetings. In those instances, policymakers may instead choose to focus on other issues, such as local economic conditions, economic education, community development, or banking and financial market regulation.

Figure 3: Number of Public Remarks by Type of Fed Official

NOTE: Through 2017.

SOURCE: Board of Governors of the Federal Reserve System, the 12 Federal Reserve Banks, Bloomberg, and authors' calculations.

The ZLB period witnessed an unprecedented rate of spoken and written communication with the public by Fed governors and Reserve Bank presidents. Figure 3 shows the annual number of public remarks by the Fed Chair, non-Chair governors, and Reserve Bank presidents since 1998.23 From 1998 to 2004, the total number of public remarks by Reserve Bank presidents remained roughly constant at about 150 per year. A slightly different pattern occurred with governors and the Fed Chair. Total remarks over this period steadily fell, but then rebounded, so that the numbers of public remarks in 2004 were close to the 1998 totals. Beginning in 2005, the total number of public remarks by Reserve Bank presidents began to increase, reaching a peak in 2013 of a little more than 220 public remarks. Interestingly, though, the FOMC Chair and governors delivered public remarks slightly less frequently over the ZLB period. Some of the reduced frequency of public remarks by members of the Board of Governors (excluding the Chair) reflects the fact that the Board has rarely operated with a full complement of Governors (seven). From 1998 to 2017, there has only been four years when there were seven governors present at the last formal meeting of the year. Indeed, at the end of 2017, there were only four governors at the December meeting. At the March 2018 meeting, the number of governors had dwindled to three.

Figure 4: Number of Times More Than One Bank President or Governor Spoke on the Same Day, 1998-2017

SOURCE: Board of Governors of the Federal Reserve System, Bloomberg, and authors' calculations.

Speeches have become important communication events. Chairman Greenspan's new economy speech in 1995 and his "irrational exuberance" speech in 1996 were among his more notable speeches. Chairman Ben Bernanke also gave notable speeches during his tenure. Two that standout are his "Deflation: Making Sure 'It' Doesn't Happen Here" speech in 2002 and his global saving glut speech in 2005. Days with multiple Fed communication events have become more numerous over time—particularly since the Financial Crisis. Figure 4 shows the increase in multiple Fed communication events on the same day stems from an increase in more than one Reserve Bank president speaking on the same day. For example, in 2017, there were 60 days when more than one Reserve Bank president spoke. In 2004, it was about half as much. By contrast, in 2017 there were only three days when more than one Fed governor spoke publicly on the same day. This is down sharply from 2003, when there were 19 days when multiple Fed governors spoke on the same day.24

In separate analysis, we looked at the annual number of public remarks by Reserve Bank presidents from January 1998 to December 2017. We separated the sample into roughly two 10-year periods: January 1998 to August 2008 (pre-Financial Crisis) and September 2008 to December 2017 (post-Financial Crisis). The number of public remarks by Reserve Bank presidents increased in all but three Fed Districts (Chicago, New York, and Richmond). The average increase in volume across these nine Districts was 46 percent. We did not examine whether the nature of the remarks by Reserve Bank presidents has changed over time. We did, however, analyze the number of speeches and public remarks given by presidents of the Fed Bank of St. Louis since January 1929. We have documented this in the boxed insert.

Volume and Subject Matter Across Time: An Example Using St. Louis Fed Presidents

The table lists the number of speeches and public remarks given by presidents of the Federal Reserve Bank of St. Louis since January 1929. The table also lists the primary subject matter of the speeches (including public remarks) under three broad headings: The economic outlook (which includes monetary policy related topics), banking and finance, and all other subjects. In general, St. Louis Fed presidents prior to the 1960s tended to give fewer speeches than presidents after the 1960s. Moreover, presidents prior to the 1960s tended to talk more about non-economic outlook topics and proportionately more about banking and finance issues relative to their modern-era counterparts.

As shown in the table, the focus in recent years has shifted toward a greater emphasis on the economic outlook, which includes macroeconomic conditions and monetary policy developments. Indeed, the economic outlook (and monetary policy related topics) comprised a very large percentage (more than 95 percent) of the speeches of the most recent two St. Louis Fed presidents—William Poole and James Bullard. Finally, consistent with the findings of Figure 3, the last column of the table shows that these two St. Louis Fed presidents have given the highest number of speeches per year of all St. Louis Fed presidents.

Other Forms of Fed Communication

In the past several years, chiefly under the Bernanke regime, the FOMC has adopted several new forms of communication to further increase transparency. As noted earlier, the Chair's quarterly press conference, beginning under Chairman Bernanke's term in January 2012, is one key innovation. Current Chairman Jerome Powell expanded on this innovation, announcing that press conferences will be held after every FOMC meeting beginning in 2019. Other innovations include the FOMC's "Statement of Longer-Run Goals and Monetary Policy Strategy," "Policy Normalization Principles and Plans," and "Summary of Economic Projections" (SEP). These are also listed in Table 1. The first two are meant to provide clarity on the Fed's dual mandate and balance sheet, respectively, while the SEP conveys projections for four key macroeconomic variables. In addition, the SEP conveys each FOMC participant's assessment of appropriate monetary policy, as indicated by their federal funds rate projections over short-, medium-, and longer-term horizons.

Grading Fed Communication

The Hutchins Center on Fiscal and Monetary Policy at Brookings conducted a survey of academics and private sector Fed watchers to assess the effectiveness of different forms of Fed communication.25 Survey participants viewed the FOMC policy statement, speeches by the FOMC Chair, and quarterly press conferences as the most useful forms of Fed communication. On net, academics generally found these forms of communication more useful than did the private sector economists and Fed watchers.

One of the key communication innovations during the Bernanke tenure was the public release of individual FOMC participants' expectations of the future level of the federal funds rate. Once a quarter, with the release of the SEP, each FOMC participant—anonymously—indicates their preference for the level of the federal funds rate at the end of the current year, at the end of the next two to three years, and over the "longer run." These projections are often termed the FOMC "dot plots." According to the survey, both academics and those in the private sector found the dot plots of limited use as an instrument of Fed communication (more "useless" than "useful"). One-third of the respondents found the dot plots "useful or extremely useful," 29 percent found them "somewhat useful," and 38 percent found them "useless or not very useful."

The limited usefulness of the dot plots probably reflects many factors. First, each participant's projection is conditioned on the highly restrictive assumption of "appropriate monetary policy." Each participant's appropriate monetary policy stance is conditioned on their view of the outlook for real GDP growth, inflation, and the unemployment rate over the medium term. Moreover, the range of participants' views may not dovetail with the policy path outlined in the FOMC statement, which can further complicate the communicated outlook and diminish the tool's effectiveness. The regular presence of dissents suggests that appropriate policy can differ sharply across the Committee.

Second, the participants may have other vastly different assumptions that influence their outlook, such as the equilibrium real interest rate; the future path of crude oil prices; the foreign exchange value of the dollar; or their outlook for foreign economic growth. For these reasons and more, FOMC participants persistently over-projected the federal funds target rate path during the early years of the current expansion. These persistent one-sided forecast errors may have impaired the credibility of the dot plots to the extent that the projections were important inputs in establishing expectations about future monetary policy.

Finally, the Brookings study revealed that survey participants believe that Reserve Bank presidents' speeches are slightly less useful than the dot plots, but still more useful than Fed reports to Congress, such as the semi-annual Monetary Policy Report.26 This finding is perhaps striking given that the number of public remarks by Reserve Bank presidents has been trending up over time, especially during the ZLB period, while the number of public remarks by the Chair and non-Chair governors was trending down.

EMPIRICAL ANALYSIS

The final section of the article assesses how financial market participants respond to various forms of Fed communication. Admittedly, this is a difficult empirical exercise for many reasons. First, public remarks by Fed senior officials are often context- and perspective-dependent. Each individual brings their own perspective, model of the economy, and view of the monetary policy transmission mechanism. These views naturally inform their assessments of appropriate monetary policy going forward, which are then conveyed in public remarks. For their part, financial market participants may become familiar with a given policymaker's view or assume a given outcome for a particular FOMC meeting. If so, markets may react only to views that are sufficiently different from expectations. Past research has demonstrated that monetary policy surprises can have significant effects on high-frequency asset prices.27 We acknowledge the importance of monetary policy surprises, but use a different approach to assess the significance of Fed communication events.

Second, when attempting to gauge the significance of public remarks, markets do not usually assign equal weights to all FOMC participants. Certainly, markets carefully parse remarks by the Chair, who is typically viewed as the public voice of the FOMC and the one who sets the policy agenda. Moreover, while the Chair's views often convey the consensus view of the Committee, the Chair nonetheless also has a policy preference. Although the Chair's preference invariably prevails, dissents still occur periodically. Indeed, Reserve Bank presidents sometimes use their public remarks, or dissents, with the intention of signaling future policy preferences or advocating for alternative frameworks.28 Still, markets may discount the views of the presidents, on average, because they believe their views unnecessarily distort market signals or future policy intentions. For example, Lustenberger and Rossi (2017) claim that remarks by Reserve Bank presidents worsen the accuracy of private sector forecasts.

With these caveats in mind, we adopt a two-pronged empirical exercise. The first exercise uses daily data to examine whether Fed communication events are associated with significant movements in key financial market variables. Admittedly, this approach has some drawbacks. First, daily financial market data tend to be more volatile compared with monthly or quarterly data. Second, this volatility arises, in part, because financial markets trade on many types of information, such as macroeconomic data or global financial or geopolitical developments. Thus, while Fed communication comprises one set of information the market uses to price assets, there are potentially many other sources of information that the market uses that we can't readily account for. Our intent is to assess market reactions to Fed communication events and not to model changes in asset price movements at a high frequency.

The second empirical exercise uses intraday data at 5-minute frequencies. Using intraday data allows us to more closely match the timing of Fed communication events with the responses in financial markets. This is the approach adopted by most of the aforementioned event studies. Our intent is to determine if the empirical results using the daily data are consistent with those from the intraday data. Before presenting the results, we provide a detailed description of our data sources and approach.

Data Sources and Approach

We study the effects of seven types of Fed communication events: FOMC meeting statements;29 FOMC minutes; Fed Chair press conferences; public remarks by the Fed Chair, non-Chair Fed governors, and Reserve Bank presidents; and unconventional monetary policy announcements.30 Five of the seven categories are included in the Brookings study. It is important to note that there is an overlap between FOMC meetings and six of the seven unconventional policy announcements we include.31 Initially, our data set included public remarks made after market hours and on weekends. Consistent with some of the literature, we initially moved an after-hours communication event to the following trading day to gauge the market's reaction to the remark. However, this approach ended up producing large reactions that were probably not tied to the public remark itself. For example, many key data releases are often issued before the market opens.32 In this case, it is difficult to determine whether the market is responding to the public remarks by a Fed official or to economic data releases that may be a surprise.33

Empirical Analysis: Daily Data

We create a series of dummy variables for the Fed communication events. Because the Brookings study found that survey participants viewed the Fed Chair press conferences as a useful form of communication, we identify regularly scheduled FOMC meetings with and without an associated press conference. In recent years, FOMC press conferences have occurred after the March, June, September, and December meetings. Since the liftoff from the ZLB at the December 2015 meeting, increases in the FOMC's federal funds target rate have occurred at meetings with an associated press conference by the Fed Chair. Our sample period is January 6, 1998, to December 29, 2017. There are nine types of communication events:

• Non-press conference FOMC meeting statements
• Press conference FOMC meeting statements
• Releases of FOMC minutes
• Remarks by the FOMC Chair
• Remarks by all other Fed governors
• Remarks by Reserve Bank presidents
• Days when there are multiple Fed communication events (e.g., speeches)
• Unconventional policy actions (e.g., large-scale asset purchases)
• Key macroeconomic data releases (e.g., industrial production)

We evaluate the market reaction for three financial instruments: the absolute value of the daily change in the yield on 2-year Treasury notes, the yield on 10-year Treasury notes, and the Chicago Board Options Exchange equity market volatility index (VIX). Changes in 2-year Treasury yields are widely viewed as being sensitive to expected changes in FOMC policy. The 10-year Treasury yield is the most liquid, long-term, risk-free interest rate in the financial markets. It is also sensitive to changes in inflation expectations and longer-term expectations about short-term interest rates. Finally, the VIX, which is often termed the market's "fear gauge," is sometimes viewed as signaling changes in economic uncertainty. This exercise can be represented by the following equation:

,

where  represents the absolute value of the daily change in financial variable i (either the 2-year Treasury yield, 10-year Treasury yield, or VIX) on day t. The independent variables include a constant, a one-day lag of the dependent variable, and a series of dummy variables (specified earlier in this section) that take the value of 1 if that event occurs on day t or are zero if the event does not occur on day t.

We analyze daily data with three ordinary least-squares regressions. We use the absolute value of the daily changes because some communication events will cause yields to increase or decrease, while others will generate no market response. Using absolute values are a more effective way to gauge the effects of communication events on financial market activity.34 We also include another dummy variable (MACRO) on days when key economic statistics are released. The motivation for this is that the market trades on information contained in these reports. Our economic statistic dummy variable takes the value of 1 when the following monthly economic reports are released (and is zero on all other days): the consumer price index, monthly employment situation, industrial production, retail sales, the Institute for Supply Management Report on Manufacturing, and the three GDP releases (advance, second, and third estimates).