FRED work:On Inflation Expectations

Use FRED database: https://fred.stlouisfed.org

In Week 6 we introduced the concept of price and inflation expectations.Might we be able to use the FRED database to examine their trends?Yes!Specifically we want to examine how "well anchored" are long-term inflation expectations.Usingmonthlydata since2003, plot a measure of long-term inflation expectations based on the difference between the yields on a "5-year Treasury Constant Maturity Rate" bond (FRED code:GS5) and a "5-year Treasury Inflation-Indexed Security, Constant Maturity," (known as a TIPS bond) (FRED code:FII5).(Make sure your final data point is March 2021.)The difference between the higher and lower interest rates of these two securities is the expected inflation rate.Why?

Let r = real interest rate, i = nominal interest rate, ^e= expected inflation rate.The interest rate on the inflation-indexed bond is r, the real rate of interest, which = i - ^e.The interest rate on the non-inflation indexed bond = i.Since those who purchase both of these bonds require the same real rate of interest (return), r, the difference between the two yields is the expected inflation rate, ^e.

So first graph FRED series GS5 (series "a"); then, using Edit Line "1," add FRED series FII5 (series "b") so that you can produce a transformed series "a - b."Note:leave the units in their raw form, since we're looking to compute an interest rate, not a rate of change in the interest rate.

So, again, what is your "deliverable"?Aone-line graphof the G55 series minus the FII5 series.(Donotattach two graphs.)

(a)Attach Graph with your Exercise #6 answers.(-

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(b)By how many points did the expected inflation rate drop between February 2020 and March 2020?(Express as a percentage, as per your graph, rounded to two decimal places.)(-

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(c)Contrast your answer to (b) with the monthly change between September 2008 and October 2008.Which is greater?Any ideas why?(-

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(d)What was so novel about the evolution of inflation expectations during the Great Recession?(-

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(e)What is the March 2021 expected rate of inflation, expressed as apercentageandrounded to 2decimal places?What do you expect to happen to inflation expectations over the next few months?Why?(-

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