Sentiment matters: Financial impact of tonal characteristics of FOMC communication

This paper empirically examines the relationship between the tonal characteristics of FOMC textual communications and key financial market variables, notably the VIX index and its subcomponents: uncertainty and risk aversion. Using textual analysis of FOMC statements and minutes from 2006 to 2023, we quantify sentiment and show that tone shifts with economic conditions and follows distinct patterns. We find that tone is significantly associated with the VIX, with stronger effects for minutes than for statements, and that the uncertainty component reacts more than the risk-aversion component. Market responses to FOMC tone also intensify during periods of elevated monetary policy uncertainty. These findings underscore the distinct roles of FOMC communication tools in shaping market expectations and show that their influence depends on both the type of document and the prevailing policy environment.