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short essays and reports on the economic issues of the day
2006 ■ Number 18

Is All That Talk Just Noise?
Jeremy M. Piger
nnouncements by the Federal Reserve regarding
its target value for the federal funds rate garner substantial attention from the media and participants
in financial markets. Indeed, there is evidence that the
“news” in these announcements, or the deviation of the
targeted funds rate from market expectations, affects the
price of assets traded in various financial markets, most
notably those for equities and bonds.
In recent years, however, communication from the
Federal Reserve has increasingly included not just policy
decisions on where to set the federal funds rate, but also
many forms of non-quantitative communication: that is,
the written statement released following meetings of the
Federal Open Market Committee; testimony by Federal
Reserve officials, particularly the Chairman, before Congress;
and speeches made by Federal Reserve governors and
regional Reserve Bank presidents. I discuss here some evidence regarding whether this large amount of written and
verbal communication is also deemed important by market
participants for valuing financial assets. This would be the
case if buyers and sellers believed that Federal Reserve talk
was informative about the direction of future policy, conveying information that should influence market expectations. In addition, market participants may value Federal
Reserve talk if they believe it conveys some new information
about the state of the economy.
A difficulty in evaluating the market effects of Federal
Reserve talk is obtaining a quantitative measure of the
content of qualitative communication. One approach is to
construct such a measure through a subjective reading of
the text. However, this approach may be contaminated by
the biases of the researcher and is cumbersome when there
is a large amount of text to analyze. In a recent study,
Michelle Bligh and Gregory Hess of The Claremont Colleges
take a different approach based on “content analysis.” Con tent analysis assesses the prevalence of words in a text that
match those in predetermined word lists created by linguists.


For example, lists that contain words that express “optimism”
or “pessimism” can be used to characterize the optimistic
or pessimistic tone of any piece of text.
Using this approach, Bligh and Hess study the effects of
a variety of written and verbal communications by Alan
Greenspan, the former Federal Reserve Chairman, over
the period 1999-2004. They find that the language used by
Chairman Greenspan had significant predictive power for
a number of financial variables. In particular, this language
was a significant predictor of equity prices as well as shortand long-term interest rates in the days immediately following the communication, with the most sustained effects
occurring in Treasury bond yields. Interestingly, all the
forms of non-quantitative communication they analyzed,
including statements, testimony, and speeches, had some
amount of predictive power.
The fact that Federal Reserve talk influences the behavior
of financial markets has at least two important and related
implications. The first is that written and verbal communication by Chairman Greenspan was taken seriously by
the markets over this period. This is no small achievement
given that such communication is by its very nature unverifiable and open to interpretation. Second, it suggests that
written and verbal communication is an effective tool that
the Federal Reserve has at its disposal to convey information to financial markets. The extent of non-quantitative
communication and the language used in these communications are likely to be important choices made by Federal
Reserve policymakers in the future. Indeed, there is already
a widely held perception that the language used in the policy
statement released following FOMC meetings under
Chairman Ben Bernanke has differed from that used under
Chairman Greenspan. ■
Bligh, Michelle and Hess, Gregory D. “A Quantitative Assessment of the Qualitative
Aspects of Chairman Greenspan’s Communications.” Unpublished manuscript,
Claremont McKenna College, 2005.

Views expressed do not necessarily reflect official positions of the Federal Reserve System.