More Than Words: Fed Chairs’ Communication During Congressional Testimonies

We study soft information contained in congressional testimonies by the Federal Reserve Chairs and analyze its effects on financial markets. We analyze text, audio and video data for 32 semi-annual congressional testimonies between 2010 and 2017 given by two recent Fed Chairs, Ben Bernanke and Janet Yellen. Using machine learning, we construct high-frequency measures of the Fed Chairs’ and Congress members' emotions.

Increases in indices of the Chair's text-, voice- or face-emotion during the testimony generally raise the S&P500 index and lower the VIX. Stock prices are particularly sensitive to both the members' questions and the Fed Chair's answers about issues directly related to monetary policy and the state of the economy. We provide evidence that market responses during the testimony are economically meaningful. The responses also propagate in the days after the testimony, reaching levels comparable with those after a policy rate cut.

Our results highlight the importance of the soft information contained in the Fed Chair's emotional signals for shaping market responses to Fed communications. In particular, our paper contributes to the literature on central bank communication in four ways. First, we use institutional features of congressional testimonies in our analysis. Second, we study different types of emotions jointly. Third, we develop novel methods and procedures to improve measurement and increase the precision of the estimates. Fourth, we examine the responses of markets to the expressions and tone of elected US officials during the testimony. In all, our findings reflect the view in psychology that communication is much more than words and underscore the need for a holistic approach to central bank communication.