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We analyze the effect of monetary policy on yield spreads between corporate bonds with different credit ratings over the business cycle. We use futures contracts to distinguish between expected and unexpected changes in the Fed funds target rate and several indicators to distinguish between different phases of the business cycle. In line with the predictions of imperfect capital market theories, we find that yields on corporate bonds with low credit ratings widen (narrow) with respect to those with high credit ratings following an unexpected increase (decrease) in the Fed funds target rate during recession periods. Several tests suggest that our results are robust to outliers, potential endogeneity problems, empirical specification, control variables, countercyclical risk premium in futures, and alternative definitions of credit spreads and economic conditions. Significant at the 10% level. t is the monthly return on the S&P 500 index. Panel A presents results based on the NBER recession dummy variable (NBER t ), which equals 1 if the economy is in a recession in month t as defined by the NBER, and 0 otherwise. Panel B presents results based on the (log) growth rate of industrial production ( ln IP t ). Panel C presents results based on the real-time recession probabilities from the estimation of equation (1). Panel D presents results based on the real-time recession probabilities from Chauvet and Piger (2008). The coefficients are estimated via OLS with HAC standard errors.