Fed officials have never raised the funds rate following a recession before the unemployment rate had peaked.
An interesting piece of research from the people at Goldman Sachs. Are we seeing unemployment starting to cap? No. So here is little reason to expect that the Fed will exit from the easing game.
The policy of the Fed is closely tied to the Taylor Rule. This is what makes the rule so effective and this is why we should still listen to what it has to say about the actions of the Fed and other central banks. The Taylor rue or formula states that the target interest rate of the central bank should be related to the the inflation rate, the real rate of interest, the output gap, and the difference between the inflation rate and its central bank target. The idea includes the goals of the Fed through some reaction function.
There is a neutral real rate of interest which is associated with the long-run growth rate of the economy. There is the current inflation rate which is associated with, in the case of the Fed, the core PCE. The reaction function will be associated with the difference between the inflation rate and the target set by the Fed. A higher coefficient associated with the inflation gap will mean there is more sensitivity to the gap between the inflation rate and the target set. The final factor will be the factor associated with the output or Okun gap named after the 1960's macroeconomist who studied the difference between actual and long-term GDP growth.
One of the flaws with using the Taylor rule for forecasting is determining what are the reaction speeds of adjustment actually used by the central bank. We can estimate the reaction variables back in time but it is less clear how much wait the current Fed places on inflation versus output gap.
Regardless of these problems, the Taylor rule has been used to assess current monetary policy. The current zero rate policy can be compared with the rate that the Taylor Rule would give based on the past behavior of the Fed during recession. What this analysis finds is that the nominal Fed funds rate should be negative. There is a gap between the current policy and what the rule would tell which some have called the monetary policy funds rate shortfall. These policy rates cannot be obtained but the exercise tells us that there will be a shortfall of growth or a sustained output gap which will be closed through continued easy monetary policy.
Do not expect the Fed to raise rates anytime soon.
An interesting piece of research from the people at Goldman Sachs. Are we seeing unemployment starting to cap? No. So here is little reason to expect that the Fed will exit from the easing game.
The policy of the Fed is closely tied to the Taylor Rule. This is what makes the rule so effective and this is why we should still listen to what it has to say about the actions of the Fed and other central banks. The Taylor rue or formula states that the target interest rate of the central bank should be related to the the inflation rate, the real rate of interest, the output gap, and the difference between the inflation rate and its central bank target. The idea includes the goals of the Fed through some reaction function.
There is a neutral real rate of interest which is associated with the long-run growth rate of the economy. There is the current inflation rate which is associated with, in the case of the Fed, the core PCE. The reaction function will be associated with the difference between the inflation rate and the target set by the Fed. A higher coefficient associated with the inflation gap will mean there is more sensitivity to the gap between the inflation rate and the target set. The final factor will be the factor associated with the output or Okun gap named after the 1960's macroeconomist who studied the difference between actual and long-term GDP growth.
One of the flaws with using the Taylor rule for forecasting is determining what are the reaction speeds of adjustment actually used by the central bank. We can estimate the reaction variables back in time but it is less clear how much wait the current Fed places on inflation versus output gap.
Regardless of these problems, the Taylor rule has been used to assess current monetary policy. The current zero rate policy can be compared with the rate that the Taylor Rule would give based on the past behavior of the Fed during recession. What this analysis finds is that the nominal Fed funds rate should be negative. There is a gap between the current policy and what the rule would tell which some have called the monetary policy funds rate shortfall. These policy rates cannot be obtained but the exercise tells us that there will be a shortfall of growth or a sustained output gap which will be closed through continued easy monetary policy.
Do not expect the Fed to raise rates anytime soon.
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