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Taylor Rule Says The Fed Should Be Tightening Now
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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"We don't need no steenkin' Taylor Rule"
The other Taylor rule: "Take your stinking paws off me, you damned dirty ape."
The Tyler Rule states:
On a long enough timeline
the exchange rate in ounces of gold
of every fiat currency drops to zero.
What about the Charles Taylor rule?
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)
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
Overage prostitutes work too.
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
The Fed is just helping the squid do God's Work
Sneaking Past CongressThis 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.
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.
Sheriff Andy Taylor's cousin from Mount Pilot?
Taylor Schmailer.
Let's get this party started!
Throttles forward and hang on tight!
Ludicrous speed bitchez!
Going to Plaid
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.
Old Charlie stole the handle
And the train, it won't stop going
No way to slow down
Locomotive Breath -- Jethro Tull
"The pumps don't work 'cause the vandals took the handles." -- Zimmerman
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!
And all those dark pools would spill out right onto the floor!
"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.
or, maybe monetary policy is the real projections the Fed has, not the "official" projection. the Fed eases when its really bad.
@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.
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.
BernaQE - hillarious!
Whats the meaning of that rule considering a probably totally wrong outlook and a target rate that doesn't match standard economical conditions?
Bubblenomics wins again
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.
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.
Try Siri. Hear it's been updated.
Offloading their balance sheet? Stop, you're killing me! What fairy tale is that going to happen in? And how?
Double reserve requirements for primary Dealers every FOMC meeting?
That would force the Primarys to buy the FRBNYs book?
Go ahead, stop buying treasuries Mr. Bernanke, I dare you. Should make 2013 a lot more fun.
+1 to the author for the use of Fed and Tightening in the same sentence.
Stanford? That's nowhere near Harvard.
That's "Hahvad" to you. Show some respect.
Hartford? Isn't that one o' them fancy ivory league schools?
fucking gold and equities need to decouple already. garbage.
Ben follows the Simon LeBon Rule.
Would that be Rio or Hungry Like The Wolf?
More like Wild Boys.
"They tried to take us. Looks like they'll try again."
If they use mark to market, the balance sheet would be near zero -- the true value of the MBS they are overpaying for.
Not really. The Stone and McCarthy and Deutsche Bank versions of the Taylor Rule call for further easiing. Oogh!
Charts here.
http://confoundedinterest.wordpress.com/2012/09/18/taylor-rule-and-the-feds-unlimited-agency-mbs-purchase-plan/
estimates brought to you by the same insane monkey that once said the following:
"subprime is contained"
"i will not monetize the debt"
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.
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.
And what are you doing about it? Typing comments on zerohedge.com doesn't count.
I've decided to become a liberal, so I only have to feel bad about it and not really do anything to fix it.
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.
How about a 'Tyler Rule.
At first, as my eyes were clearing ,I thought it actually said that.Made me laugh hahahahahaa
May not be a bad idea.Would like to know what his rule would be.
The first part of the Tyler Rule is...you do not talk about the Tyler Rule
Nice double bottom on the chart. But where are the red arrows pointing out the trend? I'm lost without them.
I always change the rules when I am playing against my 3 year old -- same thing right?
no worries, by 2015 there'll be an iphone app that will straighten everthing out-is Apple actually the Tyrell corporation spelled backward?
The Tailor rule - always make the pants a little tight so the fat bastard comes back again to get them let out.
Gee, I guess you can't really call it a rule then.
very interesting article that further illustrates the incompetence of the Fed
Tyler are you nuts? Tightening right now? We want inflation, we need inflation expectation to sink in hte mind of people who have money (the rich and corporations) to spend. Rises in prices are created by the mechanism of dishoarding capital into the circulation. INflation expectations up will do just that. THe Tyler rule is ~SAY SOMETHING CRAZY!~
The last time the Fed ignored the Taylor rule, it triggered a massive housing bubble. Where will the bubble be this time?
I don't think Taylor himself would raise rates and destroy his banking system along with the US government funding situation. The colossal screw up that is our current situation forces the Fed to takes sides and pick a loser. For the last 40 years it has picked the banks to win and the public to lose. It will keep making that choice. It is no choice at all really. The only reason the Fed has ever existed was to bail out banks in a crisis. The Fed is going to hyperinflate until the banks are solvent. However the banks will never be solvent and they will further lever up on any free money. There has been no reform. So there is merely pouring more gasoline on the fire.
To anyone that has been insulting and ignoring Peter Schiff for the last 10 years, I suggest you hit youtube and do some research. He is still right.
Apple will become the de facto World Central Bank and we will all use iMoney.
The Dollar Bubble is growing. It pops when the dollar loses reserve status. It loses reserve status when we have to print 120 trillion to cover the USA's unfunded liabilities. 16 trillion is nothing compared to the 120 trillion Social Security and Medicare/Aid are going to cost us in the coming decades. The sound you hear... that sound is FMOC sucking all the air out of the world economy.
And the "Taylor Rule Suggested" itself is too easy. John Taylor started complaining loudly about the misuse of his rule in late 2010.
Certainly, the Fed should have started shrinking its balance sheet then, and started raising rates in mid-2011. Taylor himself suggests between 1% as a starting point and heading toward 2-2.5% over a few years.
Never happen as long as the current crew is in charge of the Fed. It's hard to see putting truly different people on the Fed. Normalized monetary policy would force renewed bankruptcy on Fannie, Freddie, one bank (Citi), and possibly elsewhere, with no bailouts to mask it.
Forget the Taylor Rule. Its just more price fixing - implying a different kind of Japan. If we truly valued capital correctly, then the rule, if there must be one, should be the market's. Substituting one distortion rule for one that is "less" distortionary, IMO, only prolongs the inevitable correction that must occur before capital will once again be put to its highest (efficient) use.
It wasn't that long ago that Bernanke tried raising the Fed Funds Rate .25% at a time. It didn't go well. Cramer went viral on the MSM and You Toob with his "Rant Heard 'Round the World" and made Bernanke cry. Bernanke reversed course VERY quickly. Cramer's flushed face and meaty forearms flailing around scared the living shit out of him.
http://www.youtube.com/watch?v=rOVXh4xM-Ww
OK, here is the plan for people and corporations with money, you get taxed on your capital directly unless you spend it, I guess unlimited printing from the Fed is the same in the end....