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

Authors

Siamak Javadi, The University of Texas Rio Grande Valley
Ali Nejadmalayeri
Tim Krehbiel

Document Type

Article

Publication Date

6-3-2017

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:

Comments

© The Authors 2017. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. Original published version available at https://doi.org/10.1093/rof/rfx026

Recommended Citation

Javadi, Siamak, Ali Nejadmalayeri, and Timothy L. Krehbiel. “Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads.” Review of Finance 22, no. 5 (June 3, 2017): 1877–1909. https://doi.org/10.1093/rof/rfx026.

First Page

1877

Last Page

1909

Publication Title

Review of Finance

DOI

10.1093/rof/rfx026