Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download the most recent values for the following five variables:
(1) the 30-Year Conventional Mortgage Rate (MORTG); (2) BofA Merrill Lynch US Corporate AAA Effective Yield© (BAMLC0A1CAAAEY); (3) the 3-Month Treasury Bill: Secondary Market Rate (TB3MS); (4) the 10-Year Treasury Constant Maturity Rate (GS10); and (5) the University of Michigan’s measure of expected inflation over the next 12 months (MICH).
a. Using these data, take the most recent expected inflation rate and compute the expected real interest rate for each of the nominal interest rates: the 30-Year Conventional Mortgage Rate, BofA Merrill Lynch US Corporate AAA Effective Yield, the 3-Month Treasury Bill: Secondary Market Rate, and the 10-Year Treasury Constant Maturity Rate.
b. Suppose the actual inflation rate is greater than the expected inflation rate. Will borrowers or lenders be made worse off? Briefly explain.