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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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Tue, 09/18/2012 - 15:10 | 2808116 holdbuysell
holdbuysell's picture

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

Tue, 09/18/2012 - 15:18 | 2808157's picture

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

Tue, 09/18/2012 - 15:26 | 2808182 hedgeless_horseman
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.

Tue, 09/18/2012 - 15:33 | 2808227 Sofa King Confused
Sofa King Confused's picture

What about the Charles Taylor rule?

Tue, 09/18/2012 - 15:52 | 2808296 HeliBen
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)

Tue, 09/18/2012 - 16:32 | 2808402 icanhasbailout
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

Tue, 09/18/2012 - 17:25 | 2808558 akak
akak's picture

Overage prostitutes work too.

Tue, 09/18/2012 - 15:36 | 2808217 AlaricBalth
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

Tue, 09/18/2012 - 15:34 | 2808229 LMAOLORI
LMAOLORI's picture



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


Sneaking Past Congress


Tue, 09/18/2012 - 15:23 | 2808173 Landotfree
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.

Tue, 09/18/2012 - 16:24 | 2808375 Popo
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.

Tue, 09/18/2012 - 15:23 | 2808179 Gringo Viejo
Gringo Viejo's picture

Sheriff Andy Taylor's cousin from Mount Pilot?

Tue, 09/18/2012 - 15:12 | 2808125 Yellowhoard
Yellowhoard's picture

Taylor Schmailer.

Let's get this party started!

Throttles forward and hang on tight!

Tue, 09/18/2012 - 15:16 | 2808148 Temporalist
Temporalist's picture

Ludicrous speed bitchez!

Tue, 09/18/2012 - 15:32 | 2808225 GolfHatesMe
GolfHatesMe's picture

Going to Plaid

Tue, 09/18/2012 - 15:18 | 2808160 Divided States ...
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.

Tue, 09/18/2012 - 15:36 | 2808235 James-Morrison
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

Tue, 09/18/2012 - 15:47 | 2808274's picture

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

Tue, 09/18/2012 - 15:13 | 2808128 kralizec
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!

Tue, 09/18/2012 - 15:14 | 2808135 redpill
redpill's picture

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


Tue, 09/18/2012 - 15:13 | 2808129 101 years and c...
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.

Tue, 09/18/2012 - 15:15 | 2808143 101 years and c...
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. 

Tue, 09/18/2012 - 15:19 | 2808163 Cursive
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.

Tue, 09/18/2012 - 15:26 | 2808198 101 years and c...
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. 

Tue, 09/18/2012 - 15:34 | 2808232 GolfHatesMe
GolfHatesMe's picture

BernaQE  - hillarious!

Tue, 09/18/2012 - 15:23 | 2808141 Haager
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?

Tue, 09/18/2012 - 15:16 | 2808146 Zero Govt
Zero Govt's picture

Bubblenomics wins again

Tue, 09/18/2012 - 15:18 | 2808155 LULZBank
LULZBank's picture
Taylor Rule Says The Fed Should Be Tightening Now, The Noose Around The Middle Class.

Tue, 09/18/2012 - 15:47 | 2808273 bornlastnight
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.

Tue, 09/18/2012 - 15:59 | 2808300 akak
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.

Tue, 09/18/2012 - 16:46 | 2808451 roadsnbridges
roadsnbridges's picture

Try Siri.  Hear it's been updated.

Tue, 09/18/2012 - 15:18 | 2808158 Hype Alert
Hype Alert's picture

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

Tue, 09/18/2012 - 15:42 | 2808260 helping_friendl...
helping_friendly_book's picture

Double reserve requirements for primary Dealers every FOMC meeting?

That would force the Primarys to buy the FRBNYs book?

Tue, 09/18/2012 - 15:19 | 2808161 LawsofPhysics
LawsofPhysics's picture

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

Tue, 09/18/2012 - 15:19 | 2808164 Vincent Vega
Vincent Vega's picture

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

Tue, 09/18/2012 - 15:20 | 2808168 ParkAveFlasher
ParkAveFlasher's picture

Stanford?  That's nowhere near Harvard.

Tue, 09/18/2012 - 15:50 | 2808283 bornlastnight
bornlastnight's picture

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

Tue, 09/18/2012 - 17:32 | 2808574 TheFourthStooge-ing
TheFourthStooge-ing's picture

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

Tue, 09/18/2012 - 15:21 | 2808175 fonzannoon
fonzannoon's picture

fucking gold and equities need to decouple already. garbage.

Tue, 09/18/2012 - 15:23 | 2808186 Sutton
Sutton's picture

Ben follows the Simon LeBon Rule.

Tue, 09/18/2012 - 15:38 | 2808251 Vincent Vega
Vincent Vega's picture

Would that be Rio or Hungry Like The Wolf?

Tue, 09/18/2012 - 15:47 | 2808272 blunderdog
blunderdog's picture

More like Wild Boys.

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

Tue, 09/18/2012 - 15:28 | 2808205 CrashisOptimistic
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.

Tue, 09/18/2012 - 15:28 | 2808206 Snakeeyes
Snakeeyes's picture

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

Charts here.

Tue, 09/18/2012 - 15:29 | 2808211 101 years and c...
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"

Tue, 09/18/2012 - 15:32 | 2808221 Getting Old Sucks
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.

Tue, 09/18/2012 - 15:38 | 2808249 AldoHux_IV
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.

Tue, 09/18/2012 - 15:50 | 2808285 meco1999
meco1999's picture

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

Tue, 09/18/2012 - 16:44 | 2808442 The Alarmist
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.

Tue, 09/18/2012 - 15:50 | 2808282 blunderdog
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.

Tue, 09/18/2012 - 15:57 | 2808307 Cult of Criminality
Cult of Criminality's picture

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.

Tue, 09/18/2012 - 23:54 | 2809784 DriveByLurker
DriveByLurker's picture

The first part of the Tyler Rule do not talk about the Tyler Rule

Tue, 09/18/2012 - 16:01 | 2808318 tongue.stan
tongue.stan's picture

Nice double bottom on the chart. But where are the red arrows pointing out the trend? I'm lost without them.

Tue, 09/18/2012 - 16:14 | 2808346 topspinslicer
topspinslicer's picture

I always change the rules when I am playing against my 3 year old -- same thing right?

Tue, 09/18/2012 - 16:21 | 2808349 geewhiz190
geewhiz190's picture

no worries, by 2015 there'll be an iphone app that will straighten everthing out-is Apple actually the Tyrell corporation spelled backward?

Tue, 09/18/2012 - 16:27 | 2808369 hedgelessWhoresMan
hedgelessWhoresMan's picture

The Tailor rule - always make the pants a little tight so the fat bastard comes back again to get them let out.

Tue, 09/18/2012 - 16:43 | 2808439 The Alarmist
The Alarmist's picture

Gee, I guess you can't really call it a rule then.

Tue, 09/18/2012 - 16:45 | 2808447 dadichris
dadichris's picture

very interesting article that further illustrates the incompetence of the Fed

Tue, 09/18/2012 - 17:02 | 2808495 WhiteNight123129
WhiteNight123129's picture

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!~


Tue, 09/18/2012 - 17:16 | 2808534 One eyed man
One eyed man's picture

The last time the Fed ignored the Taylor rule, it triggered a massive housing bubble. Where will the bubble be this time?

Tue, 09/18/2012 - 17:17 | 2808535 Quinvarius
Quinvarius's picture

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.

Tue, 09/18/2012 - 17:17 | 2808540 Bastiat
Bastiat's picture

Apple will become the de facto World Central Bank and we will all use iMoney. 

Tue, 09/18/2012 - 17:20 | 2808546 Gamma735
Gamma735's picture

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.

Tue, 09/18/2012 - 17:58 | 2808661 neutrinoman
neutrinoman's picture

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.

Tue, 09/18/2012 - 18:25 | 2808735 Pareto
Pareto's picture

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.

Tue, 09/18/2012 - 19:38 | 2808937 itstippy
itstippy's picture

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.

Tue, 09/18/2012 - 21:03 | 2809240 WhiteNight123129
WhiteNight123129's picture

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....

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