This week's data marked a crucial turning point in US monetary policy. For all those "rules-following" economists out there with their various adaptions of the infamous Taylor Rule [4] (a model that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions), this week marked the point at which ALL models suggest that Fed interest rate policy is simply too easy. This explains why the Fed has shifted to a qualitative forward guidance (reminding us of porn - we'll know when to tighten when we see it) as Rick Santelli so eloquently the fact that the Fed claims to be data-dependent "is a twilight zone" and as John Taylor himself notes, the Fed's QE policy "has not worked with few if any signs of success," and now, even as they taper, their rate policy is far too easy. Simply put, they're making it up as they go along (and it's never been more obvious).
We leave it to Santelli and Taylor to destroy the myth that the Fed has a clue...
And here are the various "rules-based" approaches all flashing "tighten" signals...
The Classic Taylor Rule Model...
[5]
The "aggressive" Taylor Rule Model...
[6]
The "Rudebusch" Taylor Model...
[7]
The "Mankiw" Taylor Model...
[8]
The "Stone & McCarthy" Taylor Rule Model...
[9]
The "Deutchse Bank" Taylor Rule Model...
[10]
But of course - The Fed knows best - so we leave it to Rick Santelli to slam the Fed apologists...who defend their wavy-hands non-rules-based approach...
Charles Evans made the following statement not long ago: "for me, there is a problem with simplistic approaches. simple tailor rules failed to express policy, intentions clearly"
[ZH: Yeah - because youy fucking nailed this:
[11]
Professor, where i come from, kiss is the rule of the day. keep it simple, or stupid, i'll say, keep it simple. what is wrong with simple where every player in the marketplace can tinker with your formula and nowhere fed funds ought to be. isn't that a better way?
Isn't a rule-based fed policy preferable? absolutely.
In other words... "they're making it up as they go along..." (forward to 1:46 for the punchline)