Working Paper

The Fed Information Effect and Firm-Level Investment: Evidence and Theory

Abstract: We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes.

Keywords: monetary policy; Fed information effect; heterogeneous investment response;

JEL Classification: E22; E52; G31;

Status: Published in 2023

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2023-06-20

Number: 2023-6a

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