The Financial Impact of Fed Policy Statements and Chairman Sentiment: The Case of Gold and Silver Markets

Abstract

This study investigates the impact of Federal Reserve monetary policy decisions and communication on global gold and silver markets from May 1999 to June 2012. We argue that the discourse used by central bankers is not only a key driver of financial markets based on empirical evidence, but also, in essence, a device to convey authority and power. Using computer-assisted content analysis, we analyse speech styles of the current and former Federal Reserve Chairmen, Ben Bernanke and Alan Greenspan, to explore their impact on market sentiment. We find that the surprise component of Fed monetary policies significantly influences gold and silver markets. For example, a 1% surprise rate hike increases gold bullion prices by 1.3% and silver bullion prices by 1.5%. We also find significant stylistic differences between the two Fed Chairmen in their policy communications and their impact on market volatility.