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.