In this assignment, you will examine the path of two interest rate series and identify any trends, changes, or correlations between the two economic data series. Using the same range of years you selected for your discussion (DISCUSSION ATTACED) in Module Two (i.e., a 10- to 15-year span over the last 50 years), you will plot and compare the federal funds rate with either the prime bank loan rate or the 30-year conventional mortgage rate using the Federal Reserve Economic Database (FRED).
To understand the relationship between the federal funds rate and the prime bank loan rate or the 30-year conventional mortgage rate, read the following analogy to a car’s brakes:
Suppose you take your car to an auto repair shop because it does not stop in a safe manner when the brakes are applied. The mechanic explains that the car’s rotors are rusted out, and the brake pads are gone, and that is why the car is not stopping as needed. In this analogy, the rotors and brake pads are the federal funds rate, and the braking performance of the car is the prime bank loan rate or the 30-year conventional mortgage rate.
Directions
First, graph the monthly federal funds effective rates over your selected 10- to 15-year span. Follow the steps below to graph the data:
Visit the FRB Rates – Discount, Fed Funds, Primary Credit webpage in the FRED. This resource can be found in the Supporting Materials section below.
Under the Federal Funds Effective Rate heading, check the box next to Monthly.
Click on the Add to Graph button.
Once on the screen with the graph, adjust the dates in the two boxes in the upper right-hand corner found to the left of the red Edit Graph button. Select the same time period (i.e., 10- to 15-year span over the last 50 years) you chose for your discussion in Module Two. Selecting just the 10- to 15-year period you are examining is very important! If you do not restrict the time period, your graph will have far too much data and will show data points outside of the period you are examining.
After you have adjusted the year span, click on the blue Download button in the upper right-hand side of the screen and choose Image (graph).
Next, graph either the monthly prime bank loan rates or monthly 30-year conventional mortgage rate of your selected 10- to 15-year span, using the same instructions above. These resources can be found in the Supporting Materials section below.
For prime bank loan rates, check the box next to Monthly under the “Bank Prime Loan Rate” heading and follow steps 3–5 above.
For 30-year conventional mortgage rate, check the box next to Monthly under the 30-Year, Fixed-Rate Conventional Home Mortgage Commitments heading and follow steps 3–5 above.
After downloading the two graphs as images, insert them into a Word document along with a brief written analysis (described in the critical elements below).
Specifically, you must address the following rubric criteria:
Interest Rate Graphs
Graph 1: Graph, download, and insert an image of the graph of the federal funds effective rates from the FRED into a Word document. Use the same time period (i.e., 10- to 15-year span over the last 50 years) you chose for the Module Two discussion response.
Graph 2: Graph, download, and insert an image of the graph of the prime bank loan rates or the 30-year conventional mortgage rate from FRED into a Word document. Use the same time period (i.e., 10- to 15-year span over the last 50 years) you chose for the Module Two discussion response.
Analysis
Comparison: Analyze the two interest rates and explain how they have changed over your chosen time period, citing specific examples.
Causal Relationship: Briefly hypothesize the causal relationship between the two interest rates based on knowledge gained in the course. Cite your sources.
What to Submit
Your paper must be submitted as a 2- to 3-page Microsoft Word document with two inserted graphs, double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format.
Supporting Materials
The following resources support your work on this assignment:
Reading: FRB Rates – Discount, Fed Funds, Primary Credit
Use this webpage to find the Federal Reserve Board (FRB) rates, including the federal funds effective rate.
https://fred.stlouisfed.org/categories/118
Reading: Prime Bank Loan Rate
Use this webpage to look up the bank prime loan rate and bank prime loan rate changes.
https://fred.stlouisfed.org/categories/117
Reading: Mortgage Rates
Use this webpage to look up mortgage rates, including the contract rates on 30-year, fixed-rate conventional home mortgage commitments.
https://fred.stlouisfed.org/categories/114
