4 Predicting the Fed Funds Rate (Using FRED database) Use the FRED database to predict the fed funds rate using the following monetary policy rule and two common inflation measures ( ) (a)The FED likes to focus on the price index for personal consumption expenditures excluding food and energythe so called core measure of inflation This series has the mnemonic 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 Be sure to edit the graph to display Percent Change from Year Ago (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 it 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, 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 (series in FRED database is EFFR be sure to change to a quarterly rate) (Hint Be sure that you are comparing two nominal rates our simple rule corresponds to a real r a t e A s s u m e 2 , 0 5 , 2 )

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4. Predicting the Fed Funds Rate (Using FRED database)

Use the FRED database to predict the fed funds rate using the following monetary policy rule and two

common inflation measures.

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(a)The FED likes to focus on the price index for personal consumption expenditures excluding food and energythe so-called "core" measure of inflation. This series has the mnemonic "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? Be sure to edit the graph to display "Percent Change from Year Ago".
(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 it 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, 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 (series in FRED database is "EFFR"be sure to change to a quarterly rate). (Hint: Be sure that you are comparing two nominal rates; our simple rule corresponds to a real r a t e . A s s u m e = 2 % ,= 0 . 5 ,= 2 %)