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Activity Handout
Inflation Expectations
Author
Diego Mendez-Carbajo, Department of Economics, Illinois Wesleyan University
dmendez@iwu.edu
Step-By-Step Activity Description
The user of the FRED database will take the following steps in order to quantify the concept of inflation expectations.
(Step 1)
The user will first generate a graph of the 30-Year Treasury’s Inflation-Indexed Bonds (WTP30A28) (Category: Money, Banking & Finance > Interest Rates > Treasury Inflation-Indexed Securities)
(Step 2)
The user will then “Add a Data Series > Add New Series”, graphing the 30-Year Treasury’s Constant Maturity Bond Rate (DGS30) (Category: Money, Banking & Finance > Interest Rates > Treasury Constant Maturity)
(Step 3)
The user will then “Edit Data Series 2” (30-Year Treasury’s Constant Maturity Bond Rate (DGS30)) by deleting it [click on trash can icon to the right of the series’ name].
Next, the user will “Add a Data Series > Modify Existing Series > Data Series 1”, graphing 30-Year Treasury’s Constant Maturity Bond Rate (DGS30) (Category: Money, Banking & Finance > Interest Rates > Treasury Constant Maturity)
These steps are needed in order to have both series as part of the same database object and allow for their manipulation. This manipulation is accomplished by selecting “Create Your Own Data Transformation > Formula > b – a > Apply”
The graph now plots the difference between non-inflation-indexed and inflation-indexed Treasuries, a computation of inflation expectations.
Suggested Discussion Questions
• What average value did inflation expectations have before the 2008-2009 recession? What are the implications of such stable inflation expectations for bond prices?
• What average value did inflation expectations have after the 2008-2009 recession? Consider both the magnitude and the volatility of those figures. What are the implications of such volatile inflation expectations for bond prices?
Further Sophistications
• Plot the difference between the 10-Year Treasury’s Constant Maturity Bond Rate (DGS10) and the 10-Year Treasury’s Inflation-Indexed Bonds (WTP10J14). Compare with the previous graph. Discuss how and why 10-Year and 30-Year inflation expectations are different.
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