Assignment Prepare a written report of no more than 3-4 pages that summarizes the research and analysis undertaken below. Your focus is to provide a clear synopsis of the material presented, as well as your perspective from your research undertaken in The Exchange assignment. The purpose of this report is to educate board directors of a local bank as part of a new board training initiative. Background 1.)

Read the article: "The Yield Curve as a Leading Indicator: Some Practical Issues." This reading, "The Yield Curve as a Leading Indicator: Some Practical Issues", discusses the ability of the yield curve to predict the probability of future recessions and addresses a number of issues related to making real-time forecasts based on the yield curve, such as how best to define recession periods, measure the yield curve spread, and interpret changes in the spread.

Begin by reading to define and comprehend the following terms used in the reading including:

• Yield curve

• Real-time forecast

• Yield curve inversion

• Term spread

• Recession

Then, consider the following issues and questions:

1. Why do economists and financial market participants keep their eyes on the yield curve and pay special attention to yield curve inversions? What distinction do Estrella and Trubin make between empirical research and theoretical research? Why are both types of research important for their study of the yield curve as a leading indicator?

2. How can monetary policy cause the yield curve to flatten or invert? Will changes in investor expectations as a result of monetary policy reinforce or weaken the policy’s effect on the yield curve? Explain.

3. How do Estrella and Trubin recommend measuring the steepness of the yield curve? Why do they recommend this particular method?

4. What do Estrella and Trubin conclude about the importance of each of the following for the effectiveness of the yield curve as a predictor of future recessions? • the size of a yield curve inversion • the duration of a yield curve inversion • the source of a yield curve inversion: an increase in short-term interest rates or a decrease in long-term rates

Source: "The Yield Curve as a Leading Indicator: Some Practical Issues." Arturo Estrella and Mary R. Trubin, Current Issues in Economics and Finance 12(5), Federal Reserve Bank of New York, July/August 2006 2.)

Also, review the attached research article from economist Ed Yardeni which is focused on the U.S. yield curve and the current environment.

Questions to consider...

• Why do we care about the yield curve and what can it help to tell us? Why does it matter for financial markets, the economy, banks / financial institutions and consumers? • What trends are evident? • What risks and opportunities are inherent in the data? • How will bank consumers be affected? • What are other economists and market watchers saying about the topic currently? • What does it all mean? What is likely to occur with the yield curve? • What recommendations do you have for the board? What should the bank do? • What further research should be done? • Has the yield curve looked this way previously and if so, what did it mean then for the financial markets, the banking sector and the economy? • How does this discussion fit with a look at what has happened to bond spreads? • What additional questions do you have on this topic?