The Effect of Statements Issued by the Federal Reserve on the US Economy

If we knew how the economy, particularly the stock and bond markets, would react to the information and language in statements released by the Federal Reserve, we could predict the consequential market fluctuations. This knowledge could minimize the risk associated with those two markets and, theoretically, prevent future recessions and depressions by keeping the market steady. The Federal Reserve and its statements affect our economy, which, in turn, impacts the world. This research intended to prove that the language the Federal Reserve uses in its statements has specific, direct effects on our economy. The Federal Reserve’s language in all its statements released from 2003-2011 was analyzed using a computer program written in the programming language Python along with the Natural Language Toolkit and Scikit-learn to determine the frequency of certain phrases and words. The statements were grouped by the frequency of words and phrases within them, such that one statement may be in multiple groups, and data on interest rates, economic growth rates, unemployment rates, and the stock and bond markets from the date of release and a year after was collected. Intragroup data was compared to identify common trends in the individual group’s data from a year after the release date. Intragroup data was averaged and then compared to other group’s averages to determine if the difference in the averages was statistically significant and indicative of trends in the market corresponding to specific words or phrases in the Federal Reserve’s statements.