I am having problems figuring out the answers to these questions please help?

FIN 5090 One Pager #1 Due July 18, 2016 To understand Bernanke's concerns and the current situation today, we need to understand three questions: 1. Between August 1987 and December 2003, U.S. long-term rates fell from 9% to 4%. What factors were behind the long-term decrease in rates? 2. In 2004 and 2005, long-term rates were little changed, which surprised many. Over this period, what factors pointed to higher rates? What pointed to lower rates? 3. Much has happened since Bernanke became chairman. Synthesize all these changes. Where would you have expected long-term U.S. rates to head in 2004 and going forward? We are now in 2016 and interest rates are still very low. There are plenty of analysts and industry professionals who argue this has not been the correct approach. Obviously, the Fed has disagreed. 4. Do you agree or disagree with the Fed that keeping rates low for the past 10+ years has been the correct approach? FIN 5090 One Pager #1 Due July 18, 2016 To understand Bernanke's concerns and the current situation today, we need to understand three questions: 1. Between August 1987 and December 2003, U.S. long-term rates fell from 9% to 4%. What factors were behind the long-term decrease in rates? There are a number of reasons or factors that led to the decline of U.S long-term rates form 9% to 4% from August 1987 to December 2003. The major causes of the continued decline of the United States long-term rates include the fiscal, monetary and foreign exchange polices. This is because as the United States economy recovered from the depression, most of the private debts were assumed and transferred to the national government. This program has actually moved huge private to the central bank balance sheet that reduced the long-term interest rates. Another reason why there was a continued decline in long-term rates is because of the inflation risk and the term premium. This term premium shows the extent to which the prices of the longterm bonds gives and provides a hedge against the risks that are associated with consumption. There has been a negative term premium since 1987 to the year 2003. This negative term structure caused a deflation hedge hence suppressing the long-term rates. Private-sector deleveraging is another cause of continued decline of long-term rates. During this period of time, there was a global liquidity boom which made most of the households to take unexpected levels of debts and other side the financial institutions sharply increased their leverage. This deleveraging in the economy discouraged consumption and therefore pushes down the long-term rates down for a period of time. 2. In 2004 and 2005, long-term rates were little changed, which surprised many. Over this period, what factors pointed to higher rates? What pointed to lower rates? From the year 2004 to the year 2005, the long-term rates remained high unexpectedly. This is because of the strategies that were employed by the central bank. The Federal Reserve's tightening cycle strategy helped to raise the rates. The tightening cycle were delayed for a considerable period in order to ensure that the economy will be self-sustaining and to protect itself from a remote risk in the fall of inflation in 2003. The low rates are because of some other factors. This include the fact that the bond yields reacted to the current or even the projected macroeconomic conditions. There were also the factors of market demands for the long-term securities in which it did not consider the current economic outlook. There was also an increased intervention in the currency markets by a given number of governments especially the countries in Asia. 3. From the year 2004 to the year 2005, the long-term rates remained high unexpectedly. This is because of the strategies that were employed by the central bank. The Federal Reserve's tightening cycle strategy helped to raise the rates. The tightening cycle were delayed for a considerable period in order to ensure that the economy will be self-sustaining and to protect itself from a remote risk in the fall of inflation in 2003. The low rates are because of some other factors. This include the fact that the bond yields reacted to the current or even the projected macroeconomic conditions. There were also the factors of market demands for the long-term securities in which it did not consider the current economic outlook. There was also an increased intervention in the currency markets by a given number of governments especially the countries in Asia. 4. Ben Bernanke as the chairman of Fed brought major changes in the Federal Reserve in the United States. He improved the transparency and the communication in the market and the media. He also many press conferences hence improving both communication and transparency of the Fed. Ben also took his time to guide the public on forward transactions. He once told investors that short-term interest would remain at zero. 5. The low rates are because of some other factors. This include the fact that the bond yields reacted to the current or even the projected macroeconomic conditions. There were also the factors of market demands for the long-term securities in which it did not consider the current economic outlook. There was also an increased intervention in the currency markets by a given number of governments especially the countries in Asia. 6. Much has happened since Bernanke became chairman. Synthesize all these changes. Where would you have expected long-term U.S. rates to head in 2004 and going forward? We are now in 2016 and interest rates are still very low. There are plenty of analysts and industry professionals who argue this has not been the correct approach. Obviously, the Fed has disagreed. 7. Do you agree or disagree with the Fed that keeping rates low for the past 10+ years has been the correct approach? I would agree with the Fed for keeping the rates low for the past 10 or more years. This was a correct approach. The stable condition at the moment was a result of this approach. The rate of inflation at the moment is quite stable. The U.S currency has really established itself in the market due the fact that the Fed kept the rates low. The Fed has also established its economy for developing fiscal and monetary policies