Reference no: EM131678600

Respond to both parts and keep seperate

Part 1

Go to the Federal Reserve Bank of San Francisco's Website to read the article titled "What Moves the Interest Rate Term Structure?" dated November 7, 2011. Next, watch the YouTube video titled "What does the Federal Reserve Bank do?" (1 min 45 s) dated July 23, 2009.

Create an argument on whether the yield rate or the forward interest rate has the greater impact on interest rates in the U. S.

Analyze the current economic forecasts by the Federal Reserve, economists, and financial experts. What might be the impact of the forecasts on the interest rate term structure?

Speculate as to how the economy would function without the Federal Reserve's services, including the effect on the term rate structure, if any.

Part 2

Interest Rates

Forward interest rates verses yield interest rates in the U.S

The level of interest rates in the market is affected by so many factors on the horizon. In From the analysis, forward rates have greater impacts on interest rates.

Forward rates are the rates that are contracted today for the security that is to be issued in future. Therefore the forward interest rates is determined by considering the expectations of the market both the short term interest rates and the future or expected rate of inflation.

This rates also includes the risks of the interest rates and inflation expectations in the specific time of the year. On the other hand, yields are the averages of the forward rates. In this sense therefore, the forward rates affects the interest rates in USA than yield rates.

The long term effects of Recession

Economic recessions are often considered to cause short term events in the economy. However, the effects of the 2007-2009 recession are still felt in the economy. Unemployment is still very high while the economy is recovering from the shock. Markets have been frozen, consumer spending reduced while most of the companies reduced expenditures on research and development. The long term consequences of recession include:

Education: High unemployment and loss of income reduces the expenditure on education. This reduces the future abilities of the families to provide quality learning environment to their children.

Investment: It is projected that private investment will still remain at 20% lower than it should have been. This is expected to reduce new innovations in the market.

Loss of entrepreneurial ideas: Since the market has been frozen, customer demands went down and many of the businesses are declared bankrupt. For example in the year 2008 alone, 43,500 businesses collapsed as compared to 28,300 in 2007.

Generally, the market is yet to recover fully due to the long term effects of the recession