John Taylor (Not The FX One, The One With The Rule) Says Fed Funds Rate Should Be 1.0%, Sees No Rationale For Further QE

Tyler Durden's picture

A month ago, Zero Hedge first posted (well, technically we read it at Stone McCarthy but beat everyone else to copying and pasting it first), that according to the Taylor Rule, so widely abused by the lemming central planners in the Marriner Eccles building, the effective Fed Funds rates should, for the first time since the GFC, be positive. This is what SMRA said: "For the second consecutive quarter, the original-specification, quarterly version of the Taylor rule, based on real GDP figures and the GDP price deflator, produced a positive result. The previous day, the BEA released its advance estimate for real GDP figures in Q1 2011. Based on those numbers, the Taylor rule prediction for the federal funds rate target in Q1 2011 is +0.4%. In the previous quarter of Q4 2010, the Taylor rule prediction was +0.1%."

Now, Taylor himself, in his blog, confirms that not only should the Fed Funds rate be positive, it should be 1%.

  • Over here at Economics One, I can report that the Taylor
    Rule says that the fed funds rate should now be 1 percent, and I can
    provide the calculations. Available data (through the 1st quarter) show
    that the inflation rate is about 1.6 percent (GDP deflator smoothed over
    four quarters) and the GDP gap is about 4.8 percent (average of San
    Francisco Fed survey). This implies an interest rate of 1.5 X1.6 +
    .5X(-4.8) + 1 = 2.4 - 2.4 +1 = 1.0 percent. I am not sure why other
    reports differ, but at least the coefficients and numbers are here to
    see and check. Perhaps they are using different coefficients, but David Papell writing at Econbrowser earlier this month showed why the coefficients reported here work well.
  • So
    I think the economy would be better off if the Fed started moving to a
    higher funds rate now rather than later, and I certainly see no
    rationale for another round of quantitative easing
    . Unfortunately, it
    looks like the Fed will continue with its zero interest rate for a while
    longer, and traders will continue to debate whether or not there will
    be a QE3 adding volatility to the market.

It is ironic, then, that Taylor speaks up just in time for Jan Hatzius and Bill Dudley to start their behind closed doors meetings which will usher in QE3. After all, we have now gotten to the point where Hank Paulson will be brought out of retirement and paraded in front of Congress waving a 3 page term sheet demanding a blank check should the Russell 2000 retrace below the 100 DMA.

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LRC Fan's picture

If the Fed really wants to do QE3, but not right away, they should raise rates by 50 basis points sometime before June ends, then watch everything crash and burn.  Then QE3 would be a slam dunk.  Is it possible they raise rates AND announce QE3 or something similar at the same time?  That would be pretty nutty. 

But yeah, QE3 is a slam dunk anyway. 


Don Quixotic's picture

He just assaulted Silver.

Don Quixotic's picture

Then again that could be ISM?

hedgeless_horseman's picture

Is it me, or has the PPT gone back to the EUR/USD as its go-to drug when the SP500 is feeling down?

How much does that 6 minute high cost the addict?

We are ALL currency traders (again).

LRC Fan's picture

And ISM misses HUGE!!!!!!!

firstdivision's picture

...and you're surprised?!?

TruthInSunshine's picture

Ben S. Berrnankicide is going to get right on this.









Cognitive Dissonance's picture

After all, we have now gotten to the point where Hank Paulson will be brought out of retirement and paraded in front of Congress waving a 3 page term sheet demanding a blank check should the Russell 2000 retrace below the 100 DMA.

Speaking of bastards, where has that bastard Hank Paulson gotten to lately? I bet he's in his counting house counting all his money.

alien-IQ's picture

I hear he's been hanging out at the Bar Marmont claiming to be William Hurt...although that might just be a rumor...but it sounds plausible.

Hephasteus's picture

I thought he was teaching a course in how to get around that whole it's illegal to enter into contracts under duress thing unless the duress is a global monsterous hideous plot by insane people. IE making on offer you can't refuse.

LRC Fan's picture

First part of my prediction has come to pass.  Dow went down 90, now it will go up to about -65, before drifting higher by 35 by 3pm. 

HelluvaEngineer's picture

Yes.  As per the usual they are bidding up all the high beta junk.  Buy the dippers to pile in soon.

alien-IQ's picture

When I saw the name John Taylor, I thought "The bass player for Duran Duran on ZH? Wow"...clearly, I stand corrected:-(

firstdivision's picture

Construction spending up...more than likely on road construction.

achmachat's picture

OT, but has anyone noticed that today the 10:30 silver raid was 30 minutes early?

Re-Discovery's picture

Raid timed with ISM release.  Need to maximize effect of down data. 

Caviar Emptor's picture

Not cool with Ben Burrito

LRC Fan's picture

Why won't anyone just admit that QE2 has been a fucking failure?  All they talk about is "oh gee, QE3 is now back on the table!!!!!! Don't sell stocks now!!" and no mention of, well wait a second, if we need QE3 doesn't that mean QE2 didn't work?  And why the fuck would QE3 work? 

Dow is tanking now, hopefully a flash crash is imminent. 

the not so mighty maximiza's picture

You make too much sense no one will listen to ya.

Thisson's picture

QE will continue.  Think about this: what is to prevent the Fed from purchasing all of the bad debt out there?  Even if they were to buy all of the impaired securitized debt on the market with printed money, it would be NET deflationary, because the interest emitted from that paper will be destroyed, preventing further credit expansion.

oak's picture

with QE= frog cooking

without QE=sudden death

SeanJKerrigan's picture

At least with sudden death there is some semblance of justice, plus the wealth of regular people doesn't get completely wiped out.

The dow is already recovering.  Psychologist should really study the stock market.  This would make a great study in sensory overload and how with enough bad news, it all becomes mute.  I predict the Dow will gain much of its losses back by the end of today.

Urban Redneck's picture

What percentage of the American electorate, much the population is actually prepared for sudden death and actual price discovery in the interest rate markets?

I am a Man I am Forty's picture

sanity in an insane world

Re-Discovery's picture

Fed will NOT tighten here.  Total capitulation move.  Wont happen.

It would also be leadership and take guts.  Remember those things?

topcallingtroll's picture

Fed won't tighten, but there won't be any qe3 on the scale of qe2.  At least not for a long time and not without the acquiescence of china.

dcb's picture

If john taylor want to learn a bit about the rule he invented, he needs to speak to the bernanke. really where do these jokers come from. (LOL)

If taylor played the game better and wasn't honest, he could be sitting much more pretty right now. fool, the taylor rule is what ever goldman sachs and the boys want it to be.

I believe the taylor rule is another one of thise things the bernanke lied to under oath in congress about.

HistorySquared's picture

Of course there's a reason - if interest rates rise by that much, the Federal Reserve goes bankrupt.


Plus, other than through financial repression and eroding peoples purchasing power through dollar devaluation, how else can Beranke inflate away the governments debts,create enough inflation so that the junk they purchased from banks becomes profitable, than through transferring wealth from people who hold or earn in dollars to the Fed, then on to the Treasury?

AldoHux_IV's picture

The taylor rule is ineffective in this type of monetary/fiscal environment.  We have crossed the rubicon into a new era (although most likely short lived) where all things logical and beneficial for the economy is sacrificed for the greater good of the few.

In the end, nothing short of a reset and redesign of the system and justice brought to those who have been benefitting from predatory means and ways will cure the problem that is our current economic structure.

The Merovingian's picture

Frankly, I always thought rules were meant to be broken, but ....

What about this article Tyler posted back on 5-19-11 that referenced Scott Minerd of Guggenheim Partners stating ... 'given the current levels of unemployment and inflation, the Taylor rule says the rate should be negative 1.65 per cent' and had a nice, tidy chart showing the trend over the past 9+ years?

Did things change that much in the last 2 weeks or does someone have the math wrong?

Just curious ...