Given expected inflation premiums of 7.8%, 21.6%, and 31.4% in the next 3 years respectively, should...
- Given expected inflation premiums of 7.8%, 21.6%, and 31.4% in the next 3 years respectively, should the FED be concerned with inflation in the near term (first year), interim period (second year), or longer term (third year) period?
Homework Answers
The Expected Inflation is going up from 7.8% in near term to 31.4% in Longer term.
As per Fischer Simplified Equation
Nominal Rate = Real Rate + Inflation Rate
So, when Inflation increase it will increase the Nominal Rate, keeping Real Rate fixed, which will make cost of borrowing costly
So, Fed should Focus on Interim Period as the increase in expected inflation from near term to inter term is 13.8 basis points
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