Assignment#3 - Q1 Dates that the Fed changed interest rate...

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Unformatted text preview: Q1. * Dates that the Fed changed interest rate. Date Fed Fund Rate Discount rate Date Fed Fund Rate Discount rate 2001/01/03 6.00% 5.75% 2005/02/02 2.50% 3.50% 2001/01/31 5.50% 5.00% 2001/03/20 5.00% 4.50% 2005/03/22 2.75% 3.75% 2001/04/18 4.50% 4.00% 2005/05/03 3.00% 4.00% 2001/05/15 4.00% 3.50% 2005/06/30 3.25% 4.25% 2001/06/27 3.75% 3.25% 2005/08/09 3.50% 4.50% 2001/08/21 3.50% 3.00% 2005/09/20 3.75% 4.75% 2001/09/17 3.00% 2.50% 2005/11/01 4.00% 5.00% 2001/10/02 2.50% 2.00% 2005/12/13 4.25% 5.25% 2001/11/06 2.00% 1.50% 2006/01/31 4.50% 5.50% 2001/12/11 1.75% 1.25% 2006/03/28 4.75% 5.75% 2004/01/28 1.00%- 2006/05/10 5.00% 6.00% 2004/03/16 1.00%- 2006/06/29 5.25% 6.25% 2004/05/04 1.00%- 2006/08/08 5.25%- 2004/06/30 1.25% 2.25% 2006/09/20 5.25%- 2004/08/10 1.50% 2.50% 2004/09/21 1.75% 2.75% 2004/11/10 2.00% 3.00% 2004/12/14 2.25% 3.25% (A) (a) What is the pattern of discount rate and fed fund rate? What can you learn about how the Fed adjusts interest rate? In general, can you find explanations from the Fed statements for the interest rate adjustment in these three years?- In 2001, the pattern of fed fund rate and discount rate is down slope, but in 2004, 2005 and 2006, the patterns show upward slope. Fed has usually has taken action beforehand for maintaining the healthy economy, which is likely to be preemptive vehicle. We can say that Fed adjust interest rate to handle economic condition. That is, if output growth is expending and they worry about increasing inflation rates, interest rates are raised. However, if economy is in recession or boom era, interest rates are adjusted at lower rates. (b) How do the actual interest rates (pick 3-month, 1 year, and 10 year) adjust to Fed move? Explain how you think the market reacts to Fed cut. In particular, does the yield curve move in a parallel fashion?- Generally, (or apparently), the actual interest rates look adjusted to Fed move. However, in 2004, 2005 and 2006, they move different from past period. So we can say that market does not always adjust to Fed rate’s move. As shown in follow graph, even though short term interest rate adjusts to Fed, interest rates of 1year and 10years have quite different moves from short-term interest’s move. So the yield curve does not move in a parallel fashion....
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Assignment#3 - Q1 Dates that the Fed changed interest rate...

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