Abstract:

We examine how the Federal Reserve (Fed) communicated during the COVID-19 pandemic and compares it with other periods of stress. This comparison uses novel dictionaries related to COVID-19, unconventional monetary policy (UMP), financial stability, and usual sentiment analysis and topic modeling. We show that Fed communication during the COVID-19 pandemic focused on financial stability, market volatility, social welfare, and UMP, and presented significant contextual uncertainty. We also compare Fed communication during the COVID-19 pandemic with the dot-com and global financial crises regarding content, sentiment, and timing. We find that Fed communication and actions were more reactive to the COVID-19 crisis than to other crises. We also show that declining financial stability sentiment in interest rate announcements and minutes precedes accommodative monetary policy decisions.