This question asks you to use the FRED database to predict the fed funds rate using the chapter’s monetary policy rule. Of course, there are many possible inflation measures you could use. This question lets you consider two common ones.
(a) The Fed likes to focus on the price index for personal consumption expenditures excluding food and energy—the so-called “core” measure of inflation. This is the series “JCXFE” in the FRED database. Display a graph of the inflation rate using this measure since 2000. What is the most recent 12-month inflation rate?
(b) As an alternative, consider the price index for personal consumption expenditures without excluding food and energy. This is the series “PCECTPI” in the FRED database. Display a graph of the inflation rate using this measure since 2000. What is the most recent 12-month inflation rate measured this way?
(c) Why do you think the two measures are different (if they are)?
(d) Using each of these recent inflation rates and the monetary policy rule considered in this chapter, produce an estimate of the appropriate fed funds rate for the U.S. economy. Discuss how these rates compare to the actual fed funds rate.