Texas A&M University-Commerce, College of Business
FIN 312, Money, Banking & Financial Markets, Professor Adolfo Benavides,
Interest Rate Recommendation Project, 50 Points.
Due Date for Sections W01 and W02: Sunday, April 16, 2017.
Requirements for the Project on Interest Rate Recommendation.
I. Objective.
This project seeks to provide students with an understanding of how economic policy,
specifically monetary policy, seeks to influence the performance of the U.S. economy, as
measured by some key indicators.
Your task is to diagnose the state of the U.S. economy and its prospects for the coming
months to make a recommendation regarding what the Federal Reserve ought to do to
interest rates. Specifically, you are to recommend that the Fed take action to increase
interest rates (if you believe that the key problem is one of accelerating inflation),
decrease them (if you believe that the key problem is a recession or a stagnant economy
with high unemployment) or leave them unchanged (if neither unemployment nor
inflation seems to be a problem.)
You are to diagnose the state of the economy using actual statistics for the three key
measures of macroeconomic performance: The rate of growth of Real Gross Domestic
Product (GDP), the unemployment rate, and the inflation rate. Additionally, to
project the direction of the U.S economy in the coming months you are to use data on the
Purchasing Managers Index or the Index of Leading Economic Indicators. Brief
comments on these economic indicators follow:
As a starting point for finding the data, I suggest the following sites:
1. Good websites for many statistics about the US economy are:
The U.S. Bureau of Economic Analysis (BEA): www.bea.gov
(for data on real GDP Growth—look for the % change from the preceding period
in chained 2009 dollars).
The U.S. Department of Labor’s Bureau of Labor Statistics: www.bls.gov
(for data on Unemployment rates, and Inflation as measured by % changes in the
Consumer Price Index—CPI).
2. The National Association of Purchasing Managers (now called the Institute of
Supply Chain Management): www.ISM.ws
For the Purchasing manager’s Index, look for the “ISM Report on Business”.
Some comments of these key economic indicators:
1. GDP growth rate: reported quarterly, it measures the annual rate at which real GDP
grows during a given quarter, it is the annual speed at which the U.S. economy is
growing during that quarter. Example: If the report says that GDP growth for the first
quarter of 2016 was 1.5%, it means that is such growth rate is maintained for the next
three quarters then real GDP will have increased by 1.5% for the whole year. The
consensus among analysts is that an optimum growth rate for the U.S. is an annual rate of
about 3%. If that growth rate falls below 3% for several consecutive quarters then
growth would not be sufficient to provide additional employment opportunities for a
growing labor force and, therefore, increases in unemployment would be likely. On the
other hand, when GDP grows at a torrid pace, at an annual rate in excess of 3% to 4% for
a prolonged period of time (more than just a couple of quarters) then, according to
historical experience, the risk of accelerating inflation is increased. This is so because
during those very prosperous times of rapidly rising incomes and low unemployment,
consumers and business are very willing to get into higher levels of debt and bankers are
also be very willing to increase their lending and, under these circumstances, fueled by
purchases on credit, there is the risk that total demand for goods and services may exceed
the economy’s capacity to produce enough to satisfy those demands and, ultimately,
when demand exceeds supply, inflation is inevitable.
So, for your project, find the quarterly rate of GDP growth (in %) for the most recent six
to eight quarters and see what type of trend there is in this economic indicator during the
year and a half to two years.
2. The Unemployment Rate, reported monthly, measures those unemployed as a
percent of the labor force. Look for the for the figure for the whole country and for all
workers, even though the labor department reports the unemployment rate for different
groups based on age, race, gender, etc. Find unemployment rate figures for the past
twelve months to see what trend, if any, has developed during the past year.
NOTE: Monthly Unemployment and inflation data are compiled and published by the
U.S. Department of Labor’s Bureau of Labor Statistics at www.bls.gov
3. Over then long-term, the average annual rate of inflation in the United States has been
just under 3%. The Inflation rate is reported monthly via the Consumer Price Index for
a given month. For comparison purposes, to ascertain whether inflation is accelerating,
decelerating or remaining unchanged, one needs to compare annual inflation figures.
Here’s what you need for the project. Find the historical data set for the Consumer Price
Index (C.P.I.) monthly time series and then calculate the annual inflation rate for each of
the past six years as follows: annual inflation rate for year X = (C.P.I. December year X
minus C.P.I. December for prior year) divided by C.P.I. for December of prior year (year
X minus one). For example, the inflation rate for 2016 would be equal to the (CPI for
December of 2016 minus the CPI for December of 2015) divided by the CPI for
December of 2015. Also, look for the monthly changes in the CPI in the most recent 6 to
twelve months and make judgement regarding whether inflation is accelerating,
decelerating, or remaining relative stable relative to the recent past and relative to the
long-term annual average rate.
4. The Purchasing Managers Index is a monthly forecasting index to project the
direction of the overall economy and its manufacturing sector in the coming months.
Based on historical correlations between this index and the performance of the economy
in general and the manufacturing sector in particular, consistent readings in this index
above 42.7% over several consecutive months, suggest continuing expansion in the
overall economy. Readings above 50% indicate continuing expansion in the overall
economy and in the manufacturing sector as well. Readings below 50% indicate an
upcoming slowdown in manufacturing whereas readings below 42.7 % suggest that the
recession in the manufacturing sector of the economy is expected to spread to the rest of
the economy. From the web site number 2 above, obtain data on the PMI for the past
year and analyze the trend, if any, during the last five or six months then make a
projection about the future direction of the economy.
With this information, you can then make a judgment as to what the Federal reserve
ought to do to interest rates to promote a healthy economy
An alternative economic indicator to project the direction of the economy in the coming
months is the Index of Leading Economic Indicators. This index is based on eleven
variables whose changes precede changes in economic activity that directly affect GDP.
For instance, one of the eleven components of this Index is Building Permits. Here’s
how changes in building permits issued is a good forecaster of future economic activity:
Before any residential or commercial construction gets started, the contractor must secure
from local authorities a building permit specifying the type of project to be undertaken
and the value of such construction. The processing of such building permit applications
takes a few weeks, therefore, changes in the number and value of building permits are
good indictors of the level of construction activity (part of the Investment spending
component of GDP) some four to eight week later. Historically, several consecutive
monthly increases in the Index of Leading Economic Indicators have signaled positive
economic growth in the months ahead. Conversely, several (six or more) consecutive
monthly decreases in this Index of leading Indicators have, in the past, been associated
with a very high probability of an upcoming recession in the months to come.
II. Content Requirements.
The following requirements apply to the text / main body of your paper: The main body
of your paper should not be more than three typed, double-spaced pages in font 12, not
including your title paper, graphs or chats appendixes to present your data, and the works
cited page.
Your interest rate policy recommendation to the Federal Reserve Board (either to
increase or to decrease interest rates or to leave them unchanged) must be stated in the
opening paragraph of your paper along with a brief and general justification (explanation)
of why you have decided to suggest such policy option—what is the pressing problem or
threat confronting the economy? Is it an acceleration of inflation or the threat of it? Is it
raising unemployment or the possibility that a recession is in the making? Or is the
economy fine just as it is, with neither unemployment nor inflation being of significant
concern?
The rest of the text of your paper must be devoted to substantiating the reasons for your
monetary policy (interest rate) recommendation. In your text you must include your
analysis of the latest figures/trends in the following economic indicators:
1. GDP growth. 2. Unemployment rate. 3. Inflation as measured by percentage
changes in the Consumer Price Index. Statements such as …”the economy has
continued to grow at a healthy pace over the last few quarters”… or….”unemployment
has increased sharply in the last few months”…or… “inflation appears to be under
control” are too vague, you need to use numbers!!!
To support your assessment of where the U.S. economy is heading over the next few
months you must also include your analysis the Purchasing Managers Index or the
Index of Leading Economic Indicators.
III. Technical Requirements.
Your paper must be typed, double spaced, using a font size no smaller than 12. In
addition to the title page the report must also have approximately three pages of text
plus a works cited/bibliography page(s) and appendix page(s).
The title page must include the name(s) of student(s), title of paper, course number and
section, course title, semester offered and professor.
Sources of statistics or quotes included in the main body (text) of the paper must be
identified via abbreviated parenthetical references in the text itself. Example: Suppose
that the following statement appears in your text…
The Purchasing Managers’ Index (Chart III) increased from 53.4 in September to 54.2
in October 200x (WSJ, date) ….…. your text continues…….
A full citation, including author (if identified), title of article, report or book, name of
periodical, date of publication and relevant page(s) must be included in the works cited/
bibliography section of the paper as follows: (The full citation below refers to your
statement about the change in the Purchasing Managers Index in August 200x)
Bodipo-Memba, Alejandro, “Economic Data Show Strength in August”, The Wall Street
Journal, September xx, 200x, p. A2.
Works cited must be arranged in alphabetical order—by author’s last name (if identified)
or by name of agency publishing the report.
For each of the four economic indicators mentioned in your text you must include a
chart or graph in the Appendix section of your paper, just before the works cited /
bibliography page. Please note that in the example above, on the change in the
Purchasing Managers’ Index, there is a parenthetical reference to Chart III. Please do
not load the Appendix with extra charts or graphs or figures or statistical information that
was not mentioned in the text of your paper. Also, somewhere in the Appendix section,
perhaps at the end, include information on the source(s) for the charts. Please number
your charts in the same order that their respective economic indicators appear in the text
of your paper. All told, your Appendix must include four graphs (one for each of the
four economic indicators used in your text/analysis.)
You must generate your own graphs, rather than cutting and pasting into your
paper graphs found already made and presented in another publication.
IV. Other.
You may work on this project individually or in a team or two or three students.
Value of project: 50 points. Please note that scores for individual group members
are subject to adjustment based on peer evaluations.
Deadline for submitting paper: Sunday, April 16, 2017. There will be a 10 point
deduction for each day that the report is late.
Spelling, grammar and punctuation are important and will be considered in your
grade for this project.