Bullard's distance function

St Louis Fed president Bullard has been talking about coming off the zero interest level by focusing on the distance function from policy goals. This is an old concept first discussed in the '70's but it still has a lot of merit. You can raise or lower rates based on the distance from the goal. This is the square root of the sum of the squared difference between current levels and goals. It makes monetary policy an engineering or control problem.

Morgan Stanley does a nice job of illustrating the Bullard objective function versus the Fed fund target. If the distance function is high, cut rates and if the function is low, raise rates. We have closed the unemployment gap and the inflation gap is relatively low. This is not prospective of what the Fed will do but certainly provides a simple measure of why a rate rise should be taken.