Federal Reserve Communication and the COVID‐19 Pandemic

What the paper says

ABSTRACT In this study, we examine the Federal Reserve's communication strategies during the COVID‐19 pandemic, comparing them with communication during previous periods of economic stress. Using specialized dictionaries tailored to COVID‐19, unconventional monetary policy (UMP), and financial stability, combined with sentiment analysis and topic modeling techniques, we identify a distinct focus in Fed communication during the pandemic on financial stability, market volatility, social welfare, and UMP, characterized by notable contextual uncertainty. Through comparative analysis, we juxtapose the Fed's communication during the COVID‐19 crisis with its responses during the dot‐com and global financial crises, examining content, sentiment, and timing dimensions. Our findings reveal that Fed communication and policy actions were more reactive to the COVID‐19 crisis than to previous crises. Additionally, declining sentiment related to financial stability in interest rate announcements and minutes anticipated subsequent accommodative monetary policy decisions. We further document that communicating about UMP has become the “new normal” for the Fed's Federal Open Market Committee meeting minutes and Chairman's speeches since the Global Financial Crisis, reflecting an institutional adaptation in communication strategy following periods of economic distress. These findings contribute to our understanding of how central bank communication evolves during crises and how communication strategies adapt to exceptional economic circumstances.