Why I Constructed Using Data From The Federal Reserve
According to the yield curve I constructed using data from the Board of Governors of the U.S. Federal Reserve for the month of July 2014, I believe the country is heading in the right direction and the economy is growing despite the effects of the crisis of 2007-2009 still lingering in the economy. First the reader must understand why I believe that the economy is growing and doing well according to the yield curve I constructed with data from the Federal Reserve. The yield curve I constructed was very much an upward sloping curve, which you can see at the end of the paper. What the reader must understand about yield curves is that the slope can help predict an economy’s future. But first what is a yield curve? It is a line that plots the interest …show more content…
The curve itself shows the interest rate and the maturity rate of the debt that an investor gives to a borrower. (Kindleberger, Aliber) You will see three types of slopes when it pertains to the yield curve: Normal, Flat, & Inverted. (Cecchetti) A normal or upward slope of a yield curve shows economists that the Federal Reserve will be raising interest rates in the future and this can give investors an idea of how to invest money into the market in a fashion that can produce capital by selling and producing bonds. Usually, the Federal Reserve is going to raise interest rates as expected when the economy is growing because they’re afraid about inflation. Thus, a normal yield curve predicts economic growth. (The Board of Governors of the Federal …show more content…
Usually, the Federal Reserve is going to do this when the country’s economy is flat lining or contracting and this is the Federal Reserves response in order to try and stimulate growth. (Cecchetti) Thus, the flat yield curve is a good indicator that the economy is full of uncertainty and will most likely slow down or could potentially go into a recession. (The Board of Governors of the Federal Reserve) An inverted or downward sloping yield curve says that economists believe the Federal Reserve is going to cut interest or slash interest rates significantly. Usually, the Federal Reserve has to perform these actions in order to promote economic growth in the economy when a recession is approaching or is in a recession currently. (Cecchetti) Thus, the inverted yield curve is a good sign that the economy is going to be in a recession soon or that the economy has already been declared to be in the recessionary phase. (Board of Governors of the Federal
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