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The Taylor Rule explains it https://www.investopedia.com/terms/t/taylorsrule.asp https://www.investopedia.com/terms/t/taylorsrule.asp r = p + 0.5y + 0.5(p - 2

The Taylor Rule explains it https://www.investopedia.com/terms/t/taylorsrule.asp https://www.investopedia.com/terms/t/taylorsrule.asp r = p + 0.5y + 0.5(p - 2) + 2 Where: r = nominal fed funds rate p = the rate of inflation y = the percent deviation between current real GDP and the long-term linear trend in GDP As I said, the FED is betting that inflation is being caused by supply chain issues alone. This is obviously not true. It will get worse, so much worse, because the FED is in fact acting too slowly. https://www.chicagobooth.edu/review/what-makes-it-hard-control-inflation https://www.chicagobooth.edu/review/what-makes-it-hard-contr... "interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s in the United States, United Kingdom, and much of Europe. How much pain, and how deep of a dip, does it take to stop inflation and to keep inflation in check? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one-and-a-half times as much as inflation. So if inflation rises from 2 percent to 5 percent, interest rates should rise by 4.5 percentage points. Add a baseline of 2 percent for the inflation target and 1 percent for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5 percent. If inflation accelerates further before central banks act, reining it in could require the 15 percent interest rates of the early 1980s."

mym1990 4y ago
"During periods of stagnant economic growth and high inflation, such as stagflation, the Taylor rule provides little guidance to policy makers, since the terms of the equation then tend to cancel each other out" Although I wouldn't go as far as to say we are in stagflation, it seems like the current environment wouldn't be an optimal place to use the rule. Ultimately I think the Fed took a view and have stuck with that, for better or for worse, and they are valuing consistency over diverging economic models.
lupire 4y ago
r = p + 0.5y + 0.5(p - 2) + 2 = 1.5p + 0.5y + 1
- nostrademons 4y ago
  The "2" is actually a parameter of the rule, and is the desired inflation target. OP is just hardcoding it in because the Fed's stated inflation target is 2%. If you leave it parameterized you can't simplify the equation further, as the 0.5 distributes over the desired inflation target parameter as well. For that matter, the 0.5 is also a parameter, and is basically saying "Weight the goals of full employment and stable prices equally." If, say, you wanted to weight Fed policy 80% toward controlling inflation (to a target of 2%) and 20% toward maximizing employment, the equation would be r = p + 0.2y + 0.8(p - 2) + 2.

mym1990 4y ago

"During periods of stagnant economic growth and high inflation, such as stagflation, the Taylor rule provides little guidance to policy makers, since the terms of the equation then tend to cancel each other out" Although I wouldn't go as far as to say we are in stagflation, it seems like the current environment wouldn't be an optimal place to use the rule. Ultimately I think the Fed took a view and have stuck with that, for better or for worse, and they are valuing consistency over diverging economic models.

lupire 4y ago

r = p + 0.5y + 0.5(p - 2) + 2 = 1.5p + 0.5y + 1

nostrademons 4y ago
The "2" is actually a parameter of the rule, and is the desired inflation target. OP is just hardcoding it in because the Fed's stated inflation target is 2%. If you leave it parameterized you can't simplify the equation further, as the 0.5 distributes over the desired inflation target parameter as well. For that matter, the 0.5 is also a parameter, and is basically saying "Weight the goals of full employment and stable prices equally." If, say, you wanted to weight Fed policy 80% toward controlling inflation (to a target of 2%) and 20% toward maximizing employment, the equation would be r = p + 0.2y + 0.8(p - 2) + 2.