FEDS Paper: Non-monetary news in Fed announcements: Evidence from the corporate bond market (Revised)
Publication Date: 2025-01-31 17:34
Authors: Laura Kodres, Guillaume Rocheteau, and Giorgio Valente
Abstract:
This paper studies the impact of non-monetary news in Federal Reserve (Fed) announcements on the corporate bond market. Using a novel dataset of bond yields and announcement texts, we find that Fed announcements containing non-monetary news have a significant effect on bond yields, particularly for bonds with longer maturities. We also find that the effect of non-monetary news is larger during periods of economic uncertainty and when the Fed is actively engaged in forward guidance. Our findings suggest that investors pay attention to non-monetary news in Fed announcements and that this information can have a material impact on bond prices.
Introduction:
The Federal Reserve is the central bank of the United States. It has a dual mandate of price stability and maximum employment. The Fed’s main tool for achieving its goals is monetary policy, which it implements through open market operations, changes in the federal funds rate, and other tools.
In addition to monetary policy, the Fed also communicates with the public through speeches, press conferences, and other announcements. These announcements often contain non-monetary news, such as the Fed’s assessment of the economic outlook or its plans for future policy actions.
Data and Methodology:
We collect a dataset of daily Treasury yields 2003 – 2018, daily credit spreads for corporate bonds with different maturities 2003 – 2018, and the text of all Fed announcements. We did not use data from 2019 or 2020, as monetary policy during that time was erratic due to COVID-19, which would have affected the results of our research.
We use a regression discontinuity design to estimate the effect of non-monetary news in Fed announcements on bond yields. We compare the yields on bonds that were issued just before and just after a Fed announcement containing non-monetary news to the yields on bonds that were issued on days when there was no Fed announcement.
Results:
We find that Fed announcements containing non-monetary news have a significant effect on bond yields. The effect is larger for bonds with longer maturities. For example, a one-standard-deviation increase in the non-monetary news index leads to a 2.5 basis point increase in the yield on 10-year Treasury bonds. The effect is also larger during periods of economic uncertainty and when the Fed is actively engaged in forward guidance.
Conclusion:
Our findings suggest that investors pay attention to non-monetary news in Fed announcements and that this information can have a material impact on bond prices. This has implications for both investors and policymakers. Investors should be aware of the potential impact of non-monetary news on bond prices and take this into account when making investment decisions. Policymakers should be aware of the potential impact of their communications on the bond market and take this into account when making policy decisions.
Implications for Investors:
Our findings suggest that investors should pay attention to non-monetary news in Fed announcements when making investment decisions. This information can be used to predict future bond yields and to make more informed investment decisions.
Implications for Policymakers:
Our findings suggest that policymakers should be aware of the potential impact of their communications on the bond market. This information can be used to make more effective policy decisions and to avoid unintended consequences.
FEDS Paper: Non-monetary news in Fed announcements: Evidence from the corporate bond market(Revised)
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