Predicting Interest Rates

Economists and business planners often need to make projections of interest rates in order to effectively plan for the purchase of equipment and other assets. The timing of these investments is a critical part of the firm's financial management and can have a dramatic effect on the firm's profitability.

Required:

1. Review the following monthly interest rate data (prime rate) http://www.stls.frb.org/fred/data/irates/mprime and utilize the employment and economic information provided by the U.S. Bureau of Labor Statistics http://www.bls.gov/data/home.htm (most of which is monthly data, some is quarterly and some annual) and develop a regression model to predict interest rates using the Bureau of Labor statistics. Use only the most recent 4-5 years' data. Provide a brief explanation of the reasons why you chose the predictor(s) that you choose.

2. To follow up on the requirement above, what other economic or demographic data can you find on the web that would help in predicting the prime interest rate. Include this in your model and explain how it has or has not improved the model.