Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads

Review of Finance, Forthcoming

43 Pages Posted: 19 Jan 2014 Last revised: 16 Apr 2017

Siamak Javadi

University of Texas - Rio Grande Valley

Ali Nejadmalayeri

University of Wyoming - College of Business

Timothy L. Krehbiel

Oklahoma State University, Stillwater

Date Written: April 15, 2017

Abstract

We find that Federal Open Market Committee (FOMC) actions (especially rate cuts) narrowed corporate credit spreads during the pre-crisis period of 2002-2007. During the 2008 crisis period, we find that both conventional cuts and quantitative easing decreased spreads. But FOMC inactions caused significant widening of spreads. The effects are especially large for speculative-grade and short-maturity bonds. Overall, the policy uncertainty during the crisis and macroeconomic theories during the pre-crisis period help to explain why FOMC announcements impacted credit spreads. The Fed’s actions targeted at promoting growth and/or providing systemic liquidity were especially noted by the corporate bond market.

Keywords: Fed Fund Rate, FOMC, Corporate Bonds, Credit Spreads, Monetary Policy Actions

JEL Classification: G14; E52; G20; C53

Suggested Citation

Javadi, Siamak and Nejadmalayeri, Ali and Krehbiel, Timothy L., Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads (April 15, 2017). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2381271 or http://dx.doi.org/10.2139/ssrn.2381271

Siamak Javadi

University of Texas - Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Ali Nejadmalayeri (Contact Author)

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

Timothy L. Krehbiel

Oklahoma State University, Stillwater ( email )

Stillwater, OK 74078-0555
United States

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