Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
How Much CHIA Coins Profit from 100 Plot 10tb Farm? Hard Drive Space Mining - 13th May 21
Stock Market Bulls Getting Caught in the Whirlwind - 13th May 21
Legoland Windsor Mini land and Sky Train Virtual Tour in VR 360 - UK London Holidays 2021 - 13th May 21
Peak Growth and Inflation - 13th May 21
Where’s The Fed? Watch Precious Metals For Signs Of Inflation Panic - 13th May 21
Coronavius Covid-19 in Italy in August 2019! - 13th May 21
India Covid Apocalypse Heralds Catastrophe for Pakistan and Bangladesh - 13th May 21
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Taylor Rule Tool for Predicting Fed Interest Rate Policy

Interest-Rates / US Interest Rates Mar 19, 2010 - 03:18 PM GMT

By: Casey_Research

Interest-Rates

Best Financial Markets Analysis ArticleBud Conrad, Editor, The Casey Report writes: On March 3, I heard John Taylor over lunch at the San Francisco Federal Reserve. In his talk he reviewed the government’s bailouts and their effects on our economy. If you aren’t familiar with Taylor, he co-authored, along with Bob Hall, the macroeconomics textbook most widely used these days. In addition, he served as undersecretary of the Treasury in the early Bush years where, among other responsibilities, he was tasked with bringing a new currency to Iraq.


But for us economics nerds, he is most famous for formulating the Taylor Rule, a guideline for where the fed funds rate should be set. While there is more to it, the general idea is to use the inflation rate and the gap in GDP growth from its potential growth rate.

To make sure that inflation doesn’t get out of control, the fed funds rate should be higher with higher inflation. When the economy is doing poorly, a lower fed funds rate can help the economy.

The Taylor Rule incorporates these two items into the calculation to suggest an appropriate level for the Fed to use in setting its overnight rate. The basic rule is that the appropriate rate for the Fed can be calculated as follows:

Rate = 1.5 X inflation % + 0.5 X (real GDP gap %) + 1%

In the chart just below, I calculated what the Taylor Rule indicated would be a reasonable level for the fed funds rate (in orange), overlaid with the actual fed funds rate (in red). It shows how the Fed kept rates too low in 2004, fueling the housing bubble. That was Taylor’s major point and is documented in his latest book.

A similar comment could be made about 1975-1977. The wild swing down at the end of 2008, with negative inflation and GDP growth, indicated that the economy was so bad that the rate should go below zero, an impossibility. Even so, that provides some justification for the extreme actions of the Fed in undertaking its quantitative easing.

Looking to the future, the more important concern for me is that the end of the chart seems to indicate that the appropriate rate has already moved up to 4%. That’s because the measure of inflation used here for personal consumption expenditures has turned from negative to positive.

If you think inflation will be rising and the economy will not be as bad going forward, you might expect rates to head higher soon. Of course, the Taylor Rule for rates and the actual rates don’t follow an exact track, but using data from the last quarter of 2009, we see a dramatic turnaround in the pressures on rates, based on the Taylor Rule.

Taylor was surprisingly critical of the long lists of bailout programs, citing data that they had very little positive effect on other measures of the economy. He implied we would have done better with less of these measures, including the granddaddy of the Fed’s actions, to buy $1.25 trillion mortgage-backed securities (MBS), as mortgage rates dropped only slightly. He said we shouldn’t worry about deflation, as he considers it unlikely but felt that in the future we will be worrying about inflation.

In combination, the conclusions I came away with were supportive of our position that the country’s economic problems are not over, and that inflation will be added to the list of those problems in the future.

As you can see, Bud, along with Doug Casey and the other editors of The Casey Report, don’t have a rosy outlook on the economy. They believe that it is imperative for any serious investor to foresee and protect themselves from the perfect economic storm that’s in store for us. Read more here

© 2010 Copyright Casey Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in