Paper empirically examines market pricing effects of political rhetoric on the Federal Reserve

Michela Baretti, Umberto Collodel, and Jacopo Zacch'è published a working paper examining whether financial markets interpret political pressure from the executive branch on the Federal Reserve as signals of future monetary policy. The study uses Reuters press releases from 1988 to 2025, spanning approximately four decades, and classifies texts into dovish and hawkish pressure using an open-source large language model ensemble, estimating daily reactions in interest rate expectations, the US dollar, inflation compensation, and market volatility. The study claims that dovish pressure lowers near-term interest rate expectations by about 1 basis point per event, equivalent to a 4% increase in the implied probability of a rate cut at the next FOMC meeting, with the effect monotonically decaying over time and disappearing after three months; no identifiable market effect was detected for hawkish pressure.

AI-generated from reports · 23 hr agoUpdated