Question

Go to the St. Louis Federal Reserve FRED database, and find daily yield data on the following U.S. treasuries securities: one-month (DGS1MO), three-month (DGS3MO), six-month (DGS6MO), one-year (DGS1), two-year (DGS2), three-year (DGS3), five-year (DGS5), seven-year (DGS7), 10-year (DGS10), 20-year (DGS20), and 30-year (DGS30). Download the last full year of data available into a spreadsheet.

a. Construct a yield curve by creating a line graph for the most recent day of data available, and for the same day (or as close to the same day as possible) one year prior, across all the maturities. How do the yield curves compare? What does the changing slope say about potential changes in economic conditions?

b. Determine the date of the most recent Federal Open Market Committee policy statement. Construct yield curves for both the day before the policy statement was released and the day on which the policy statement was released. Was there any significant change in the yield curve as a result of the policy statement? How might this be explained?

Short answer

The yield curve became a straight line parallel to the horizontal axis after the policy announcement. Following the implementation, the inflation rate has risen to $21\%$

Step-by-step solution

Definition

The fixed amount of income investment that is handed to the entity for a particular period of time is referred as bond.

Explanation (part a)

Yield curve can be expressed as :

According to the yield curve, there is a fall in the interest rate from the previous year $2017$to the current year $2018$. According to the yield curve, unemployment is prevailing in the economy and the economic growth is $2.5\%$, which is the same as $2017.$

Explanation (part b)

Yield curve before the policy statement:

According to the recent data still March 2018, the yield curve is downward sloping from left to right.

Yield curve after the policy statement:

After the policy statement, the yield curve has become a straight line parallel to the horizontal axis. After the statement, the inflation rate is reached to$2.1\%$