Question
Our objective will be to get some more granularity by understanding the practical implications of what the Federal Reserve does with its framework for shaping
Our objective will be to get some more granularity by understanding the practical implications of what the Federal Reserve does with its framework for shaping the monetary policy in the United States. Specifically, given the limited time we have in this 1-credit course, we will focus on interest rates as these reflect the cost of money which is central to all business decisions.
Starting with a brief review of the Fed's dual mandate, we will see how they use key interest rates to shape the economy and how these fundamental points of influence transmits the Feds intentions to all the other asset classes in the economy. By the end of this unit, I expect that students will have acquired a good understanding of the interest rate ecosystem that engulfs all economic activity.
In all, the presented material will help students review and build upon the Unit 1 lessons on the crucial role of the Federal Reserve in managing the interest rate environment and, through that, the pricing of all assets in the economy. The readings will show that the Fed Funds rate acts as a sort of a hinge around which develops the term structure of interest rates on government debt (treasuries), and the default risk-free aspect of treasuries then shapes the interest rates for all the other asset classes. All these rates together shape the financial conditions in the economy as loose or tight, viz., facilitating or inhibiting economic activity, respectively.
Below are the 7 lecture notes:
- The Fed's Dual Mandate
- The Federal Funds Rate
- United States Treasuries
- Corporate Bonds
- Spreads on Yields
- Corporate Equities
- Consumer Money
In one short paragraph, briefly discuss how you expect to apply the concepts/skills learned in Unit 2.*
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