The FOMC of the U.S. Federal Reserve, December of 2025, provides the following median forecast for...

 

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The FOMC of the U.S. Federal Reserve, December of 2025, provides the following median forecast for year-end 2026: FOMC Expectations Inflation Unemployment FOMC Parameters 2% 5% a for Taylor Rule 0.5 U* 4% 1.5% 2% Deficit Financing Budget Deficit $800 billion Plan 50% t-bills and 50% t-bonds Risky/Risk Free Bond Spread 2.5% 1. Draw the original equilibrium for the government bond market. Assume the Fed's monetary policy move results in a 25 basis point reduction in the risk-free short-rate/long-rate spread. Now draw in the shifts in the curve(s) and the new equilibrium for the government bond panel. 2. Assume the risky/risk free spread stays the same. Draw in any necessary curve(s) shifts and the new equilibrium for the corporate bond panel. The FOMC of the U.S. Federal Reserve, December of 2025, provides the following median forecast for year-end 2026: FOMC Expectations Inflation Unemployment FOMC Parameters 2% 5% a for Taylor Rule 0.5 U* 4% 1.5% 2% Deficit Financing Budget Deficit $800 billion Plan 50% t-bills and 50% t-bonds Risky/Risk Free Bond Spread 2.5% 1. Draw the original equilibrium for the government bond market. Assume the Fed's monetary policy move results in a 25 basis point reduction in the risk-free short-rate/long-rate spread. Now draw in the shifts in the curve(s) and the new equilibrium for the government bond panel. 2. Assume the risky/risk free spread stays the same. Draw in any necessary curve(s) shifts and the new equilibrium for the corporate bond panel.