Do you think that the fed uses the Taylor Rule?

[blazespinnaker]

Fed funds = Equilibrium (Neutral) Real Short Rate + Actual Inflation + 0.5(Actual Inflation – Target Inflation) + 0.5(Actual GDP – Potential GDP)

I am reading pimco paul, and he argues that the fed is slavishly (ok my word) following the taylor rule.

What do you think?

eg:

What does it imply right now? The Core PCE deflator is presently running about 2˝% versus the Fed’s 2% target, so that would imply the Fed should be holding the Fed funds rate 75 basis points above neutral – the 50-basis point upside miss, plus a penalty of one-half that amount. In turn, the unemployment rate is presently about 4˝% versus the Fed’s presumed 5% full employment unemployment rate; that miss would imply tacking another 75 basis points on top of the neutral Fed funds rate.

(he uses employment instead of gdp, which is explained in his little paper

http://www.pimco.com/LeftNav/Feature...tober+2006.htm

)

[Finster]

Re: Do you think that the fed uses the Taylor Rule?

Fed funds = Equilibrium (Neutral) Real Short Rate + Actual Inflation + 0.5(Actual Inflation – Target Inflation) + 0.5(Actual GDP – Potential GDP)

I am reading pimco paul, and he argues that the fed is slavishly (ok my word) following the taylor rule.

What do you think?

...

I sure hope not. There are so many things wrong with that formula I scarcely know where to start. Just about everything in it is unknown, from the "equilibrium" short rate to actual inflation to potential GDP. Even if if you knew them exactly, it is simply not valid to compare interest rates and inflation from two different time frames; interest rates are a prospective quantity while inflation is only known retrospectively.

[blazespinnaker]

Re: Do you think that the fed uses the Taylor Rule?

Well, paul argues that the neutral rate should vary, so I guess you'd be in agreement there.

[bart]

Re: Do you think that the fed uses the Taylor Rule?

Fed funds = Equilibrium (Neutral) Real Short Rate + Actual Inflation + 0.5(Actual Inflation – Target Inflation) + 0.5(Actual GDP – Potential GDP)

I am reading pimco paul, and he argues that the fed is slavishly (ok my word) following the taylor rule.

What do you think?

Yes, I'm sure they use it. Economists are slaves to their models much like other professions. The problem of course, as Finster noted, is the incoming data quality.

Even if the inflation rate correction is half of what John Williams says, that would make a neutral Fed Funds rate of over 7%.

[Finster]

Re: Do you think that the fed uses the Taylor Rule?

Well, paul argues that the neutral rate should vary, so I guess you'd be in agreement there.

McCulley is so confused he could argue with himself and lose. Just for starters, how does he define his "neutral rate"? Arguably a neutral rate is one which fosters neither inflation nor deflation, but if that's how you define it, it's one heck of a lot higher than that three-and-change percent he seems to think is where the Fed should have stopped. For crying out loud, the Fed went way past that and policy still looks inflationary.

Bart - has the money supply been contracting the past couple of years???

[bart]

Re: Do you think that the fed uses the Taylor Rule?

Bart - has the money supply been contracting the past couple of years???

No way, non Jose.

[Finster]

Re: Do you think that the fed uses the Taylor Rule?

No way, non Jose.

... i take it you do not agree with McCulley's assertion the Fed has been restrictive ...