Module 2 FRED data - This is a homework assignment for ECO 306. I received an A in the class. This PDF

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This is a homework assignment for ECO 306. I received an A in the class. This is to help provide an Idea for the assignment....

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RUNNING HEAD: FRED Data

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FRED Data From 2005 to 2020 Dylan Dunlap ECO – 306 November 4, 2021 Professor L. Tatulli

RUNNING HEAD: FRED Data

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In this paper we will discuss the Effective Federal Funds Rate and the Bank Prime Loan Rate. We will be looking at the time era of April of 2005, which was slightly before the great recession, to April of 2020 which was after an economic boom and part of the COVID-19 pandemic. This data will be provided by the Federal Reserve Economic Database.

This first graph shows the federal funds effective rate. We will discuss events that impacted the highs and the lows of the market. This timeline starts in 2005 when the United States market was recovering after 9/11. The years from 2005 to 2007 was the peak of the housing market. These years also showed all the signs of the upcoming great recession. The federal funds effective rate in 2005 was at 2.79% and growing to a peak of 5.26% in July of 2007. By the end of 2007 the second greatest economic recession will have started. There are several choices by the banking system that helped push the economy into this recession. One of these reasons is that “…financial institutions actually sought out risky mortgage loans in pursuit of profits from high-yielding securities (such as an MBS or CDO), and to do so, held onto highrisk investments while engaging in multiple sectors of the mortgage securitization industry” (Coghlan, 2019). The reason banks decided to distribute mortgages to borrowers who were likely

RUNNING HEAD: FRED Data

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to default on their loans was for the profit they would make in fees. These fees came from the risky mortgage-backed securities. To capitalize on these fees’ banks started distributing mortgages left and right to borrowers that could not afford the homes they were purchasing. Because of these risky actions the Federal Funds Effective Rate dropped down to 0.15% in 2009. The great recession finally ended because “… the Federal Reserve maintained an exceptionally low level for the federal funds rate target and sought new ways to provide additional monetary accommodation” (Weinberg, 2013) The accommodations that the government provided were monetary bailouts to the banking system. After 2009, the federal funds rate didn’t fluctuate very much, if at all until late 2015. According to Amadeo, this was done to stimulate economic growth. In 2015, the economy was growing; unemployment was at 5.0% and the federal fund rate rose to 0.24%. By the end of 2016, the rate increased to 0.54%. The rates continued to rise to 2.41% in 2019 and in the same year the rates were lowered to 1.55%. According to an article from The Balance, the rate was lowered in 2019 to slow economic growth because the economy was growing to fast which is unhealthy in the long term. The final year of this time era was the beginning to the Coronavirus pandemic. The economy came to a halt to slow the infection rate and because of this the federal fund rate was decreased to .05%.

RUNNING HEAD: FRED Data

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The graph above shows the bank prime loan rates for the period of April 2005 to April 2020. The bank prime loan rate can be used as a reference to the rate that banks will issue loans. Another article from The Balance states “Banks base the prime rate on the federal funds rate, generally setting it three percentage points higher” (Amadeo, 2020). If you compare the two graphs this statement relatively stands true. Through the 15-year time period the prime interest rate was consistently 3 percent higher than the federal fund rate. The prime rate doesn’t just impact mortgage rates either. When one is borrowing money from the bank the rate the borrower gets may not be the prime rate. If the bank offers a rate higher than the prime rate there is a more perceived risk with that borrower, the larger the gap between the rate offered and the prime rate means there is more perceived risk. Banks will charge a higher rate for some individuals to cover some of the unpaid loans they have. Just like the federal fund rate, it is important to monitor the prime rate to ensure your loans have the best possible rate. If rates are less than when the borrower obtained their loan a negotiation with the bank can be had to lower the rate. This negotiation is called a refinance. Federal fund rates and Prime bank rates are very similar. Both rates are impacted by the economy and monetary policy that the governments issues. These rates are affected by supply and demand. As demand rises, prime rates and the federal rate will rise. The inverse occurs when supply is higher than the demand. Where these rates don’t follow the supply and demand is by governmental monetary policy. In instances like the housing market in late 2020 and into 2021, rates should be high based on the low supply and high demand. But prime rates are low, sitting at 3.25% which is roughly 3% higher than the federal funds rate according to FRED. This low rate in times of high demand remains low because of monetary policy. This is an attempt to rejuvenate the American economy after the recession.

RUNNING HEAD: FRED Data

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Amadeo, K. (2020, December 5). The prime interest rate and how it affects you. The Balance. Retrieved November 6, 2021, from https://www.thebalance.com/prime-interest-rate3305956. Amadeo, K. (2021, September 24). How the Fed funds rate has changed through history. The Balance. Retrieved November 6, 2021, from https://www.thebalance.com/fed-funds-ratehistory-highs-lows-3306135. Bank Prime Loan Rate. FRED. (2021, October 29). Retrieved November 4, 2021, from https://fred.stlouisfed.org/series/DPRIME. Coghlan, E. (2019, May 8). What really caused the great recession? Institute for Research on Labor and Employment. Retrieved November 4, 2021, from https://irle.berkeley.edu/whatreally-caused-the-great-recession/. Federal funds effective rate. FRED. (2021, November 1). Retrieved November 3, 2021, from https://fred.stlouisfed.org/series/FEDFUNDS. Weinberg, J. (2013, November 22). The great recession and its aftermath. Federal Reserve History. Retrieved November 6, 2021, from https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath....