Taylor Rule Says The Fed Should Be Tightening Now

Tyler Durden's picture

Once upon a time, the Federal Reserve decided to adopt the Taylor rule, named after Stanford economist John Taylor, as its key determinant in setting the Fed Funds rate. Then, after it realized that the original formulation of the Taylor rule was too constricting and not as permissive to pro-inflationary policy as the Fed's financial sector superiors demanded, it decided to adjust the Taylor rule formulation to its own parameters so that it was always in sync with whatever policy, monetary or as of QEterenity, pseudo-fiscal, it decided to pursue. In the meantime, John Taylor has become one of the more vocal critics of Ben Bernanke's printing ways if for no other reason then because the original Taylor rule says that instead of ZIRP at least until 2015, the Fed should be tightening right now.

Guggneheim's Scott Minerd comments:

Following the latest FOMC meeting, the committee announced a new asset purchase program and an extension of their low rate pledge through mid 2015 in an effort to stimulate economic growth and improve the labor market.  In addition, the FOMC also released its latest outlook on inflation and unemployment.  Based on the new estimates for inflation and unemployment, the optimal Federal Funds Target rate suggested by the Taylor rule would suggest the Fed funds rate should rise to over 2% by mid-2015, in contrast to the Fed’s pledge to keep rates near zero through that time. In light of this analysis, it appears likely that the FOMC will fall behind the curve in raising rates, especially given its new outlook on economic growth and its pledge to keep rates on hold through mid 2015.


What this means is that by the time 2015 rolls by, all else equal, the Fed will be far behind on the tightening curve and when it finally does admit tightening is overdue, it will have to scramble to not only hike short-term rates, but promptly proceed to commence offloading its balance sheet which as we calculated will be $5 trillion by then, or nearly 100% higher than it is now, and with a DV01 of $4 billion. Oops.

What this will mean for risk, i.e., stock prices, is self-explanatory. Luckily for Bernanke, by then the collapse in the stock market which will finally shift to a phase of liquidity extraction, will be some other Fed Chairman's problem.

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holdbuysell's picture

"We don't need no steenkin' Taylor Rule"

CrockettAlmanac.com's picture

The other Taylor rule: "Take your stinking paws off me, you damned dirty ape."

hedgeless_horseman's picture



The Tyler Rule states:

On a long enough timeline
the exchange rate in ounces of gold
of every fiat currency drops to zero.

HeliBen's picture

Bernank has adopted the James Taylor Rule.

I've seen subprime and I've seen AIG, GMC, TARP, and Freddie's Fannie,
I've seen debt explosions and financial implosions that I thought would never end,
I've seen lonely times when Ron Paul and those ZeroHedge nuts were never a friend,
But I always thought with enough QE that I'd see some real GDP and lower unemployment again... (sigh, it's tough being me)

icanhasbailout's picture

I thought he was following the Lawrence Taylor rule - after your glory days are over, become an addict, play a lot of golf, and seek out underage prostitutes

akak's picture

Overage prostitutes work too.

AlaricBalth's picture

The other other Taylor Rule:

By and by, you will find they will tear the Constitution to shreds, as they have begun now; they won't have to begin; they have started long ago to rend the Constitution of our country in pieces; ...but we will stand by and maintain its principles and the rights of all men of every color, and every clime.
John Taylor, 1884

LMAOLORI's picture



The Fed is just helping the squid do God's Work


Sneaking Past Congress


Landotfree's picture

This is the funniest article yet.  I tell you wait, have the Fed raise a half a point a quarter and see what happens.   The equivalent of financial nuclear blast.   

Hey, I am all for it but that is not the mission of the Fed.  The Fed's mission is simple:  delay the final collapse as long as possible and assist in making the system the largest ever before the collapse.

Lemmings can continue their march to their doom or stop today and meet their maker.... either way it's not going to end well for quite a few unfunded liabilities.   All I see is a bunch of unfunded liabilities complaining.

Popo's picture

Actually, Bernanke just wants to finish his term and move to a small island in the Carribean under a false identity.   Then he'll read Zerohedge every day and watch some other chump try to keep all the plates spinning.    He has two options: Go down in history as the guy who blew up the world, or retire to an island in peace.  Just watch.   I'll put any amount on him quietly sneaking off stage when his term is over, and going incognito for a while.

Gringo Viejo's picture

Sheriff Andy Taylor's cousin from Mount Pilot?

Yellowhoard's picture

Taylor Schmailer.

Let's get this party started!

Throttles forward and hang on tight!

Divided States of America's picture

For the zillioneth time already....STFU about Fed raising rates, that aint gonna happen!

John, wish you were the one at the controls but NO you aint, the Bernank is, and hes driving this train full steam towards the cliff.

James-Morrison's picture

Old Charlie stole the handle
And the train, it won't stop going
No way to slow down

Locomotive Breath -- Jethro Tull

CrockettAlmanac.com's picture

"The pumps don't work 'cause the vandals took the handles." -- Zimmerman

kralizec's picture

Tightening, heh, that's a good one!  Ben just loosened the belt, soon the pants will hit the floor.  How's that for tight?  LOL!

redpill's picture

And all those dark pools would spill out right onto the floor!


101 years and counting's picture

"In addition, the FOMC also released its latest outlook on inflation and unemployment.  Based on the new estimates for inflation and unemployment"

based on Fed's projections......


'nuff said.

101 years and counting's picture

or, maybe monetary policy is the real projections the Fed has, not the "official" projection.  the Fed eases when its really bad. 

Cursive's picture

@101 years and counting

My thoughts exactly.  The economic numbers are fudged.  Not to be believed.  I think BernanQE et al had a look at a different set of projections last week.

101 years and counting's picture

whats the saying?  do as they do, not what they say?

just waiting for the next earnings warning, followed by a new one every day or 2 until E in 2012 = $88, which puts future PE at 16.50 during a recession. 

Haager's picture

Whats the meaning of that rule considering a probably totally wrong outlook and a target rate that doesn't match standard economical conditions?

Zero Govt's picture

Bubblenomics wins again

LULZBank's picture
Taylor Rule Says The Fed Should Be Tightening Now, The Noose Around The Middle Class.

bornlastnight's picture

How is "middle class" determined?  By the quantity of food stamps one holds or by the quality of food stamps one holds?

I could never get a good answer using Google.

akak's picture


How is "middle class" determined?

If you find yourself stuck in the middle between stagnant or falling wages and rising prices on all the necessities of life (despite all the "sub 2% CPI" bullshit propaganda from the Bernankster and his lapdogs in the BLS), you can consider yourself middle class.

roadsnbridges's picture

Try Siri.  Hear it's been updated.

Hype Alert's picture

Offloading their balance sheet?  Stop, you're killing me!  What fairy tale is that going to happen in?  And how?

helping_friendly_book's picture

Double reserve requirements for primary Dealers every FOMC meeting?

That would force the Primarys to buy the FRBNYs book?

LawsofPhysics's picture

Go ahead, stop buying treasuries Mr. Bernanke, I dare you.  Should make 2013 a lot more fun.

Vincent Vega's picture

+1 to the author for the use of Fed and Tightening in the same sentence.

ParkAveFlasher's picture

Stanford?  That's nowhere near Harvard.

bornlastnight's picture

That's "Hahvad" to you.  Show some respect.

TheFourthStooge-ing's picture

Hartford? Isn't that one o' them fancy ivory league schools?

fonzannoon's picture

fucking gold and equities need to decouple already. garbage.

Sutton's picture

Ben follows the Simon LeBon Rule.

Vincent Vega's picture

Would that be Rio or Hungry Like The Wolf?

blunderdog's picture

More like Wild Boys.

"They tried to take us.  Looks like they'll try again."

CrashisOptimistic's picture

If they use mark to market, the balance sheet would be near zero -- the true value of the MBS they are overpaying for.

Snakeeyes's picture

Not really. The Stone and McCarthy and Deutsche Bank versions of the Taylor Rule call for further easiing. Oogh!

Charts here.


101 years and counting's picture

estimates brought to you by the same insane monkey that once said the following:

"subprime is contained"

"i will not monetize the debt"

Getting Old Sucks's picture

Who gives a shit about rules anymore?  Congress?  Senate?  President?  Certainly not the banks.  It's every man for themselves and their own, so proceed accordingly.  Just don't let anyone know what you're doing or how you're doing it.

AldoHux_IV's picture

Everything hinges upon the masses waking up... the more eveyone's in denial about the state of things and the media/politicians/overlords continues to get away with the charade the longer the fed can get away with bloating its balance sheet.

It's both a curse and a blessing we are the solution to this problem because it requires all of us doing something about it.

meco1999's picture

And what are you doing about it? Typing comments on zerohedge.com doesn't count.

The Alarmist's picture

I've decided to become a liberal, so I only have to feel bad about it and not really do anything to fix it.

blunderdog's picture

Given the size of divergence on the graph back in '02 (that 4% peak), I don't think one can make any reasonable guess as to how things would've turned out differently.  A 2% Fed rate discrepancy is HUGE.