How important is the Fed information effect? Evidence from the corporate bond market

48 Pages Posted: 10 Dec 2019 Last revised: 3 Dec 2021

See all articles by Michael Smolyansky

Michael Smolyansky

Board of Governors of the Federal Reserve System

Gustavo Suarez

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2021

Abstract

Does expansionary monetary policy drive up risky asset prices? Or, do investors interpret policy easing as a signal that economic fundamentals are weaker than they previously believed, thus lowering risky asset prices? We test the relative strength of these two forces within the U.S. corporate bond market and find strong evidence that the second force—known as the “Fed information effect”—empirically dominates. In particular, following an unanticipated monetary policy tightening (easing), riskier corporate bonds outperform (underperform) safer corporate bonds. We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about economic fundamentals.

Keywords: monetary policy, corporate bonds, reaching for yield, Federal Reserve information

JEL Classification: E40, E52, G12, G14

Suggested Citation

Smolyansky, Michael and Suarez, Gustavo, How important is the Fed information effect? Evidence from the corporate bond market (December 1, 2021). Available at SSRN: https://ssrn.com/abstract=3492049 or http://dx.doi.org/10.2139/ssrn.3492049

Michael Smolyansky (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gustavo Suarez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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