You work for a local financial services firm. One of your jobs is to write the monthly newsletter. This month’s topic is:Will interest rates be higher or lower in April 2020?
Your task is to write you one-page newsletter and provide your educated guess whether bond prices (and, therefore, interest rates) will increase or decrease from their current level by April 2020. (This is just a generic discussion about the general level of bond prices and interest rates, not any one specific bond price/interest rate.) To establish a basis for your forecasted increase or decrease, you need to find economic forecasts of the relevant variables influencing bond demand and supply.
To find those forecasts, you use the information available at
There you will find a number of forecasted variables. For this project, select only the forecasts for:
- U.S. Real GDP Growth Rate;
- S&P 500; and
- U.S. Inflation
What you need to do is determine whether the forecast of each variable is for an increase or a decrease over the next eight months. For example, if the inflation rate in April is higher than it is in August 2019, that is a forecast of rising inflation. If the rate of inflation in April 2020 is lower than it is in August 2019, that is a forecast of fall in inflation.
Determine for each variable listed whether the forecast is for an increase or decrease between now (august in the tables) and next April.Focus on the direction of change, not the magnitude of the predicted change. Using this information, you must then decide how each variable’s forecast might affect either the demand for bonds or the supply of bonds. Once you have decided on the possible effects of each variable, make a prediction on the overall effect: Will the demand for bonds increase? Decrease? Similarly for the supply of bonds.
When you have made your decision about the overall effect, illustrate it using the bond demand and supply model.
In writing up your newsletter, you must include:
1.What the actual forecasts are for the three economic variables;
2.A discussion of the possible effects from these variables on the bond market, making clear the effects on bond demand and/or bond supply;
3. An illustration of your conclusion using the bond demand and supply model. Show the original equilibrium level of the price of bonds and the new equilibrium price; and
4.A discussion of how your outcome will be revealed in the general level of interest rates.
Your newsletter must not exceed one typed page, reasonable margins, and font size (nothing smaller than 11). Failure to abide by these parameters will result in lost points.