Does sentiment in Fed governors’ speeches shape US equity market sectors?

This paper investigates the responsiveness of US equity sectors to the sentiments conveyed by the speeches of the governors of the US Federal Reserve (the Fed). Using principal component analysis of the scores of four Lexicon dictionaries to analyze speeches from June 1, 1996, to September 30, 2023, we find convincing evidence of a significant reaction to the sentiment index by the consumer discretionary, financial, information technology, raw materials, real estate, and utilities sectors. This reaction is asymmetric, as negative sentiments affect the US sectors more quickly than positive sentiments. Among the sectors, communication services, industrial, consumer staples, and energy sectors only respond significantly to negative sentiments. Furthermore, speeches by the Fed chairman have a greater effect, as shown by the significant reaction of eight sectors, followed by speeches by the vice chairman affecting five and speeches by the governor influencing only three. These results showing the market's asymmetrical response in terms of the types and sources of sentiment have valuable implications for a broad group of market participants. • US equity sectors react to Fed Governors' sentiments. • Negative sentiments affect sectors more than positive ones. • Quick reaction to negative sentiments in shorter windows. • Heterogeneous responses by different US sectors. • Insights for policymakers, and portfolio investors.