Financial Stability and the Fed: Evidence from Congressional Hearings

Abstract

This paper retraces how financial stability considerations interacted with U.S. monetary policy before and during the Great Recession. Using text-mining techniques, we construct indicators for financial stability sentiment expressed during testimonies of four Federal Reserve Chairs at Congressional hearings.Including these text-based measures adds explanatory power to Taylor-rule models. In particular, negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylorrule factors, even in the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks.JEL classifications: E52, E58, N12

Taylor Rules and Liquidity in Financial Markets

“…On the other hand, we relate to works that analyse official reports and documents to assess whether the Fed takes into account financial factors. Oet and Lyytinen (2017) and Peek, Rosengren, and Tootell (2016) find that discussing financial stability in FOMC meetings affects policy decisions, Wischnewsky, Jansen, and Neuenkirch (2019) reinforce this evidence analysing congressional hearings of Fed Chairmen. We restrict our focus to liquidity factors because QE injections addressed this specific issue through bal-ance sheet expansions.…”

Econometrics Meets Sentiment: An Overview of Methodology and Applications

“…Wischnewsky et al . (2019) use the package to create a “Sentoindex” that represents financial stability sentiment as expressed during testimonies at U.S. Congressional hearings. The sentiment computation in sentometrics is lexicon‐based, but other sentiment scores can be used as input for further aggregation.…”