{"id":10797,"date":"2014-06-13T09:39:21","date_gmt":"2014-06-13T13:39:21","guid":{"rendered":"http:\/\/multiplier-effect.org\/?p=10797"},"modified":"2014-06-13T09:39:21","modified_gmt":"2014-06-13T13:39:21","slug":"mcculley-on-fed-policy-inflation-and-the-taylor-rule","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/mcculley-on-fed-policy-inflation-and-the-taylor-rule\/","title":{"rendered":"McCulley on Fed Policy, Inflation, and the Taylor Rule"},"content":{"rendered":"

Paul McCulley, a familiar face at Levy Institute events (he gave a keynote<\/a> at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note<\/a> is (predictably) worth a read.<\/p>\n

His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular victory in the long War Against Inflation” and discusses, among other things, how the Great Moderation fed into Minskyan financial instability, how we should think about the Fed’s “neutral” real policy rate, and what this means for the question of whether stocks and bonds are overvalued. Here he is on the Taylor Rule:<\/p>\n

The \u201cneutral\u201d real policy rate is not<\/span><\/strong> secularly constant.<\/p>\n

It evolves<\/span><\/strong> as a function of changing \u201creal\u201d economic variables \u2013 demographics, technological progress, productivity, etc. \u2013 as well as changing institutional arrangements, notably changes in the degree of regulation of banking and finance, domestically and internationally. Thus, the notion of a \u201cfixed\u201d center of real policy rate gravity for prudent monetary policy is an oxymoron.<\/p>\n

Which is why, for me, it is so befuddling that the Fed, and thus the markets, still clings \u2013 even if reluctantly \u2013 to one man\u2019s estimate of an \u201cequilibrium\u201d real fed funds rate, made in 1993: John Taylor, who assumed<\/span><\/strong> it to be 2%, which, in his own words, was because it was \u201cclose to the assumed steady state growth rate of 2.2%.\u201d<\/em><\/p>\n

And that assumption became embedded in his ubiquitous Taylor Rule.<\/p>\n

[…]<\/p>\n

… that\u2019s the origin of the 4% number that, to this day<\/span><\/strong>, the FOMC prints as its \u201clonger-term blue dot<\/span><\/strong>\u201d for where the fed funds rate \u201cshould be\u201d (if<\/span><\/strong> the Fed were, theoretically, pegging the meter on both of its mandates).<\/p>\n

I\u2019ve got to hand it to John, whom I\u2019ve known and liked for a very long time: Twenty-one years on, and you are still hardwired into the catechism of Fed policy!<\/p>\n

But surely, economic life has changed since 1993, about the same time that Al Gore was inventing the Internet.<\/p>\n

I believe the FOMC\u2019s 4% nominal longer-term blue dot<\/span><\/strong> \u2013 which implicitly embeds John\u2019s 2% real rate assumption<\/span><\/strong> \u2013 is wrong, unless we want to say that 2014 is 1993 redux. I don\u2019t.<\/p><\/blockquote>\n

Read the whole thing<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Paul McCulley, a familiar face at Levy Institute events (he gave a keynote at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note is (predictably) worth a read. His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular […]<\/p>\n","protected":false},"author":202,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[40],"tags":[492,39,759,1130,340,369,913,908],"class_list":["post-10797","post","type-post","status-publish","format-standard","hentry","category-monetary-policy","tag-fed","tag-inflation","tag-interest-rate","tag-levy-institute","tag-monetary-policy-2","tag-paul-mcculley","tag-pimco","tag-taylor-rule"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10797","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/202"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=10797"}],"version-history":[{"count":7,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10797\/revisions"}],"predecessor-version":[{"id":10809,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10797\/revisions\/10809"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=10797"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=10797"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=10797"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}