Story 1: Fed Desperate To Rise Above the Near Zero Fed Funds Rate Target Range — Need Three Months Of 300,000 Plus Per Month Job Creation, Wage Growth and 3% First Quarter 2015 Real Gross Domestic Product Growth Numbers To Jump to .5 – 1.0% Range Fed Funds Rate Target — June 2015 Launch Date Expected — Fly Me To The Moon — Summertime — Launch — Abort On Recession — Videos
Amazing seven year old sings Fly Me To The Moon (Angelina Jordan) on Senkveld “The Late Show”
Forrest Gump JFK “I Gotta Pee” Scene
Fed Decision: The Three Most Important Things Janet Yellen Said
Press Conference with Chair of the FOMC, Janet L. Yellen
Monetary Policy Based on the Taylor Rule
Many economists believe that rules-based monetary policy provides better economic outcomes than a purely discretionary framework delivers. But there is disagreement about the advantages of rules-based policy and even disagreement about which rule works. One possible policy rule would be for the central bank to follow a Taylor Rule, named after our featured speaker, John B. Taylor. What would some of the advantages of a Taylor Rule be versus, for instance, a money growth rule, or a rule which only specifies the inflation target? How could a policy rule be implemented? Should policy rule legislation be considered? Join us as Professor Taylor addresses these important policy questions.
Murray N. Rothbard on Milton Friedman pre1971
On Milton Friedman | by Murray N. Rothbard
Who Was the Better Monetary Economist? Rothbard and Friedman Compared | Joseph T. Salerno
Joseph Salerno “Unmasking the Federal Reserve”
Rothbard on Alan Greenspan
Milton Friedman – Money and Inflation
Milton Friedman – Abolish The Fed
Milton Friedman On John Maynard Keynes
Hayek on Keynes’s Ignorance of Economics
Friedrich Hayek explains to Leo Rosten that while brilliant Keynes had a parochial understanding of economics.
On John Maynard Keynes | by Murray N. Rothbard
Hayek on Milton Friedman and Monetary Policy
Friedrich Hayek: Why Intellectuals Drift Towards Socialism
Capitalism, Socialism, and the Jews
The Normal State of Man: Misery & Tyranny
Peter Schiff Interviews Keynesian Economist Laurence Kotlikoff 01-18-12
Larry Kotlikoff on the Clash of Generations
Extended interview with Boston University Economics Professor Larry Kotlikoff on his publications about a six-decade long Ponzi scheme in the US which he says will lead to a clash of generations.
Kotlikoff also touches on what his projections mean for the New Zealand economy and why Prime Minister John Key should take more attention of New Zealand’s ‘fiscal gap’ – the gap between all future government spending commitments and its future revenue track.
Thomas Sowell on Intellectuals and Society
Angelina Jordan – summertime
Angelina Jordan synger Sinatra i semifinalen i Norske Talenter 2014
Release Date: March 18, 2015
For immediate release
Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 16-17, 2014.
1. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table
2. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. Return to table
3. Longer-run projections for core PCE inflation are not collected. Return to table
Figure 1. Central tendencies and ranges of economic projections, 2015-17 and over the longer run
Central tendencies and ranges of economic projections for years 2015 through 2017 and over the longer run. Actual values for years 2010 through 2014.
Change in real GDP Percent
2010
2011
2012
2013
2014
2015
2016
2017
Longer Run
Actual
2.7
1.7
1.6
3.1
2.4
–
–
–
–
Upper End of Range
–
–
–
–
–
3.1
3.0
2.5
2.5
Upper End of Central Tendency
–
–
–
–
–
2.7
2.7
2.4
2.3
Lower End of Central Tendency
–
–
–
–
–
2.3
2.3
2.0
2.0
Lower End of Range
–
–
–
–
–
2.1
2.2
1.8
1.8
Unemployment rate Percent
2010
2011
2012
2013
2014
2015
2016
2017
Longer Run
Actual
9.5
8.7
7.8
7.0
5.7
–
–
–
–
Upper End of Range
–
–
–
–
–
5.3
5.2
5.5
5.8
Upper End of Central Tendency
–
–
–
–
–
5.2
5.1
5.1
5.2
Lower End of Central Tendency
–
–
–
–
–
5.0
4.9
4.8
5.0
Lower End of Range
–
–
–
–
–
4.8
4.5
4.8
4.9
PCE inflation Percent
2010
2011
2012
2013
2014
2015
2016
2017
Longer Run
Actual
1.3
2.7
1.6
1.0
1.1
–
–
–
–
Upper End of Range
–
–
–
–
–
1.5
2.4
2.2
2.0
Upper End of Central Tendency
–
–
–
–
–
0.8
1.9
2.0
2.0
Lower End of Central Tendency
–
–
–
–
–
0.6
1.7
1.9
2.0
Lower End of Range
–
–
–
–
–
0.6
1.6
1.7
2.0
Note: Definitions of variables are in the general note to the projections table. The data for the actual values of the variables are annual.
Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy
Appropriate timing of policy firming
2015
2016
Number of participants
15
2
Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to 1/4 percent will occur in the specified calendar year. In December 2014, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2015, and 2016 were, respectively, 15, and 2.
Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate Number of participants with projected midpoint of target range or target level
Midpoint of target range
or target level (Percent)
2015
2016
2017
Longer Run
0.125
2
0.250
0.375
1
1
0.500
0.625
7
0.750
0.875
3
1.000
1.125
1
1
1.250
1.375
2
1.500
1.625
1
6
1.750
1.875
3
2.000
1
2.125
1
2.250
1
2.375
2.500
2.625
1
3
2.750
2.875
2
3.000
1
3.125
4
3.250
3.375
2
1
3.500
7
3.625
2
3.750
1
2
6
3.875
1
4.000
1
2
4.125
4.250
1
Note: In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.
Janet Yellen Isn’t Going to Raise Interest Rates Until She’s Good and Ready
The key words in Janet L. Yellen’s news conference Wednesday were rather pithy, at least by central bank standards. “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” Ms. Yellen, the Federal Reserve chairwoman, said.
With this framing, Ms. Yellen was putting her firm stamp on the policy of an institution she has led for just over a year — and making clear that she will not be boxed in. Her words and accompanying announcements conveyed the message that the Yellen Fed has no intention of taking the support struts of low interest rates away until she is absolutely confident that economic growth will hold up without them.
Photo
Janet Yellen held a news conference after a meeting of the Federal Open Market Committee in Washington on Wednesday.CreditChip Somodevilla/Getty Images
Ms. Yellen’s comments about patience versus impatience were part of that dance. But the dual message was even more powerful when combined with other elements of the central bank’s newly released information, which sent the signal that members of the committee intend to move cautiously on rate increases.
By eliminating the reference to “patience,” Paul Edelstein, an economist at IHS Global Insight, said in a research note, “The Fed did what it was expected to do.”
“But beyond that,” he added, “the committee appeared much more dovish and in not much of a hurry to actually pull the trigger.”
Fed officials’ forecasts of how high rates will be at year’s end for 2015, 2016 and 2017 all fell compared to where they were in December. They marked down their forecast for economic growth and inflation for all three years, implying that the nation’s economic challenge is tougher and inflation risks more distant than they had seemed a few months ago.
Particularly interesting was that Fed officials lowered their estimate of the longer-run unemployment rate, to 5 to 5.2 percent, from 5.2 to 5.5 percent. With joblessness hitting 5.5 percent in February, that implied that policy makers are convinced the job market has more room to tighten before it becomes too tight. Fed leaders now forecast unemployment rates in 2016 and 2017 that are a bit below what many view as the long-term sustainable level, which one would expect to translate into rising wages.
In other words, they want to run the economy a little hot for the next couple of years to help spur the kinds of wage gains that might return inflation to the 2 percent level they aim for, but which they have persistently undershot in recent years.
Apart from the details of the dovish monetary policy signals Ms. Yellen and her colleagues sent, it is clear she wanted to jolt markets out of any feeling that policy is on a preordained path.
At times over the last couple of years, the Fed had seemed to set a policy course and then go on a forced march until it got there, regardless of whether the jobs numbers were good or bad, or whether inflation was rising or falling. That is certainly how it felt when the Fed decided in December 2013 to wind down its quantitative easing policies by $10 billion per meeting, which it did through the first nine months of 2014 with few signs of re-evaluation as conditions evolved.
In her first news conference as chairwoman a year ago, Ms. Yellen had suggested that rate increases might be on a similar preordained path by saying that she could imagine rate increases “around six months” after the conclusion of quantitative easing. (That comment increasingly looks to have been a rookie mistake, and she later backed away from it.)
There are likely to be plenty of twists and turns in the coming months. After this week’s meeting, Ms. Yellen reinforced the message she has been trying to convey that the committee really will adapt its policy to incoming information rather than simply carry on with the path it set a year ago.
If the strengthening dollar and falling oil prices start to translate into still-lower expectations for future inflation, the Fed will hold off from rate rises — and the same if wage gains and other job market indicators show a lack of progress.
Conversely, if the job market recovery keeps going gangbusters and it becomes clear that inflation is going to rise back toward 2 percent, Ms. Yellen does not want to be constrained by language about “patience.”
“This change does not necessarily mean that an increase will occur in June,” Ms. Yellen said, “though we cannot rule that out.”
She has now bought herself some latitude to decide when and how the Fed ushers in an era of tighter money. Now the question is just how patient or impatient American economic conditions will allow her to be.
In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point. This aspect of the rule is often called the Taylor principle.
The rule of was first proposed by John B. Taylor,[1] and simultaneously by Dale W. Henderson and Warwick McKibbin in 1993.[2] It is intended to foster price stability and full employment by systematically reducing uncertainty and increasing the credibility of future actions by the central bank. It may also avoid the inefficiencies of time inconsistency from the exercise ofdiscretionary policy.[3][4] The Taylor rule synthesized, and provided a compromise between, competing schools of economics thought in a language devoid of rhetorical passion.[5] Although many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, research shows that the rule has advanced the practice of central banking.[6]
As an equation
According to Taylor’s original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:
In this equation, both and should be positive (as a rough rule of thumb, Taylor’s 1993 paper proposed setting ).[7] That is, the rule “recommends” a relatively high interest rate (a “tight” monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low interest rate (“easy” monetary policy) in the opposite situation, to stimulate output. Sometimes monetary policy goals may conflict, as in the case of stagflation, when inflation is above its target while output is below full employment. In such a situation, a Taylor rule specifies the relative weights given to reducing inflation versus increasing output.
The Taylor principle
By specifying , the Taylor rule says that an increase in inflation by one percentage point should prompt the central bank to raise the nominal interest rate by more than one percentage point (specifically, by , the sum of the two coefficients on in the equation above). Since the real interest rate is (approximately) the nominal interest rate minus inflation, stipulating implies that when inflation rises, the real interest rate should be increased. The idea that the real interest rate should be raised to cool the economy when inflation increases (requiring the nominal interest rate to increase more than inflation does) has sometimes been called the Taylor principle.[8]
During an EconTalk podcast Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the interest rate. If inflation were to rise by 1%, the proper response would be to raise the interest rate by 1.5% (Taylor explains that it doesn’t always need to be exactly 1.5%, but being larger than 1% is essential). If GDP falls by 1% relative to its growth path, then the proper response is to cut the interest rate by .5%.[9]
Alternative versions of the rule
While the Taylor principle has proved very influential, there is more debate about the other terms that should enter into the rule. According to some simple New Keynesian macroeconomic models, insofar as the central bank keeps inflation stable, the degree of fluctuation in output will be optimized (Blanchard and Gali call this property the ‘divine coincidence‘). In this case, the central bank need not take fluctuations in the output gap into account when setting interest rates (that is, it may optimally set .) On the other hand, other economists have proposed including additional terms in the Taylor rule to take into account money gap[10] or financial conditions: for example, the interest rate might be raised when stock prices, housing prices, or interest rate spreads increase.
Empirical relevance
Although the Federal Reserve does not explicitly follow the Taylor rule, many analysts have argued that the rule provides a fairly accurate summary of US monetary policy under Paul Volcker and Alan Greenspan.[11][12] Similar observations have been made about central banks in other developed economies, both in countries like Canada and New Zealand that have officially adopted inflation targeting rules, and in others like Germany where the Bundesbank‘s policy did not officially target the inflation rate.[13][14] This observation has been cited by Clarida, Galí, and Gertler as a reason why inflation had remained under control and the economy had been relatively stable (the so-called ‘Great Moderation‘) in most developed countries from the 1980s through the 2000s.[11] However, according to Taylor, the rule was not followed in part of the 2000s, possibly leading to the housing bubble.[15][16] Certain research has determined that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules.[17]
Criticisms
Athanasios Orphanides (2003) claims that the Taylor rule can misguide policy makers since they face real-time data. He shows that the Taylor rule matches the US funds rate less perfectly when accounting for these informational limitations and that an activist policy following the Taylor rule would have resulted in an inferior macroeconomic performance during the Great Inflation of the seventies.[18]
Jump up^Henderson, D. W.; McKibbin, W. (1993). “A Comparison of Some Basic Monetary Policy Regimes for Open Economies: Implications of Different Degrees of Instrument Adjustment and Wage Persistence”. Carnegie-Rochester Conference Series on Public Policy39: 221–318. doi:10.1016/0167-2231(93)90011-K.
Jump up^Paul Klein (2009). “time consistency of monetary and fiscal policy,” The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.
Jump up^Kahn, George A.; Asso, Pier Francesco; Leeson, Robert (2007). “The Taylor Rule and the Transformation of Monetary Policy”. Federal Reserve Bank of Kansas City Working Paper 07-11. SSRN1088466.
Jump up^Asso, Pier Francesco; Kahn, George A.; Leeson, Robert (2010). “The Taylor Rule and the Practice of Central Banking”. Federal Reserve Bank of Kansas City Working Paper 10-05. SSRN1553978.
Jump up^Benchimol, Jonathan; Fourçans, André (2012). “Money and risk in a DSGE framework : A Bayesian application to the Eurozone”. Journal of Macroeconomics34 (1): 95–111, Abstract.
Jump up^Taylor, John B. (2009). Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Hoover Institution Press. ISBN0-8179-4971-2.
Jump up^Carvalho, Carlos; Nechio, Fernanda (2013). “Do People Understand Monetary Policy?”. Federal Reserve Bank of San Francisco Working Paper 2012-01.SSRN1984321.
Rep. Brady’s first round of questioning during JEC employment hearing 8-8-11
August 5th 2011 CNBC Stock Market Squawk Box July 2011 Jobs Report
AARP: Jeffrey Davis on 2011 Unemployment
Unemployment Rate Primer
NewsBusted 8/5/11
Peter Schiff “If Bush Had Been A Better President We Would Not Have Elected Obama!”
Market Plunge Startles Investors, But Fed ‘Out of Ammo’ Amid Double-Dip Fears
The August 2011 unemployment report from the Bureau of Labor Statistics indicated that the unemployment rate had declined slightly from 9.2% to 9.1% in July and 117,000 nonfarm jobs were created with 154,000 jobs created in the private sector.
Series Id: LNS14000000 Seasonally Adjusted Series title: (Seas) Unemployment Rate
Labor force status: Unemployment rate
Type of data: Percent or rate
Age: 16 years and over
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
2000
4.0
4.1
4.0
3.8
4.0
4.0
4.0
4.1
3.9
3.9
3.9
3.9
2001
4.2
4.2
4.3
4.4
4.3
4.5
4.6
4.9
5.0
5.3
5.5
5.7
2002
5.7
5.7
5.7
5.9
5.8
5.8
5.8
5.7
5.7
5.7
5.9
6.0
2003
5.8
5.9
5.9
6.0
6.1
6.3
6.2
6.1
6.1
6.0
5.8
5.7
2004
5.7
5.6
5.8
5.6
5.6
5.6
5.5
5.4
5.4
5.5
5.4
5.4
2005
5.3
5.4
5.2
5.2
5.1
5.0
5.0
4.9
5.0
5.0
5.0
4.9
2006
4.7
4.8
4.7
4.7
4.6
4.6
4.7
4.7
4.5
4.4
4.5
4.4
2007
4.6
4.5
4.4
4.5
4.4
4.6
4.7
4.6
4.7
4.7
4.7
5.0
2008
5.0
4.8
5.1
4.9
5.4
5.6
5.8
6.1
6.2
6.6
6.8
7.3
2009
7.8
8.2
8.6
8.9
9.4
9.5
9.5
9.7
9.8
10.1
9.9
9.9
2010
9.7
9.7
9.7
9.8
9.6
9.5
9.5
9.6
9.6
9.7
9.8
9.4
2011
9.0
8.9
8.8
9.0
9.1
9.2
9.1
This would normally be good news.
Looking closely at the numbers reveals that the labor participation declined to 63.9% the lowest rate since January 1984 when the U.S. economy was starting to recover from a recession that ended in November 1982.
Normally the labor participation rate falls in a range of between 66% to 67%.
Since President Obama has been in office the labor participation rate has declined from 65.7% in January 2009 to the new low of 63.9% in July 2011.
Even during the 12 month economic recovery from July 2009 through June 2010 the labor participation rate never went back over 66% and in fact never exceeded 65.7%.
Series Id: LNS11300000 Seasonally Adjusted Series title: (Seas) Labor Force Participation Rate
Labor force status: Civilian labor force participation rate
Type of data: Percent or rate
Age: 16 years and over
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
1980
64.0
64.0
63.7
63.8
63.9
63.7
63.8
63.7
63.6
63.7
63.8
63.6
1981
63.9
63.9
64.1
64.2
64.3
63.7
63.8
63.8
63.5
63.8
63.9
63.6
1982
63.7
63.8
63.8
63.9
64.2
63.9
64.0
64.1
64.1
64.1
64.2
64.1
1983
63.9
63.8
63.7
63.8
63.7
64.3
64.1
64.3
64.3
64.0
64.1
64.1
1984
63.9
64.1
64.1
64.3
64.5
64.6
64.6
64.4
64.4
64.4
64.5
64.6
1985
64.7
64.7
64.9
64.9
64.8
64.6
64.7
64.6
64.9
65.0
64.9
65.0
1986
64.9
65.0
65.1
65.1
65.2
65.4
65.4
65.3
65.4
65.4
65.4
65.3
1987
65.4
65.5
65.5
65.4
65.7
65.5
65.6
65.7
65.5
65.7
65.7
65.7
1988
65.8
65.9
65.7
65.8
65.7
65.8
65.9
66.1
65.9
66.0
66.2
66.1
1989
66.5
66.3
66.3
66.4
66.3
66.5
66.5
66.5
66.4
66.5
66.6
66.5
1990
66.8
66.7
66.7
66.6
66.6
66.4
66.5
66.5
66.4
66.4
66.4
66.4
1991
66.2
66.2
66.3
66.4
66.2
66.2
66.1
66.0
66.2
66.1
66.1
66.0
1992
66.3
66.2
66.4
66.5
66.6
66.7
66.7
66.6
66.5
66.2
66.3
66.3
1993
66.2
66.2
66.2
66.1
66.4
66.5
66.4
66.4
66.2
66.3
66.3
66.4
1994
66.6
66.6
66.5
66.5
66.6
66.4
66.4
66.6
66.6
66.7
66.7
66.7
1995
66.8
66.8
66.7
66.9
66.5
66.5
66.6
66.6
66.6
66.6
66.5
66.4
1996
66.4
66.6
66.6
66.7
66.7
66.7
66.9
66.7
66.9
67.0
67.0
67.0
1997
67.0
66.9
67.1
67.1
67.1
67.1
67.2
67.2
67.1
67.1
67.2
67.2
1998
67.1
67.1
67.1
67.0
67.0
67.0
67.0
67.0
67.2
67.2
67.1
67.2
1999
67.2
67.2
67.0
67.1
67.1
67.1
67.1
67.0
67.0
67.0
67.1
67.1
2000
67.3
67.3
67.3
67.3
67.1
67.1
66.9
66.9
66.9
66.8
66.9
67.0
2001
67.2
67.1
67.2
66.9
66.7
66.7
66.8
66.5
66.8
66.7
66.7
66.7
2002
66.5
66.8
66.6
66.7
66.7
66.6
66.5
66.6
66.7
66.6
66.4
66.3
2003
66.4
66.4
66.3
66.4
66.4
66.5
66.2
66.1
66.1
66.1
66.1
65.9
2004
66.1
66.0
66.0
65.9
66.0
66.1
66.1
66.0
65.8
65.9
66.0
65.9
2005
65.8
65.9
65.9
66.1
66.1
66.1
66.1
66.2
66.1
66.1
66.0
66.0
2006
66.0
66.1
66.2
66.1
66.1
66.2
66.1
66.2
66.1
66.2
66.3
66.4
2007
66.4
66.3
66.2
65.9
66.0
66.0
66.0
65.8
66.0
65.8
66.0
66.0
2008
66.2
66.0
66.1
65.9
66.1
66.1
66.0
66.1
66.0
66.0
65.8
65.8
2009
65.7
65.7
65.6
65.6
65.7
65.7
65.5
65.4
65.1
65.1
65.0
64.7
2010
64.8
64.8
64.9
65.1
64.9
64.7
64.6
64.7
64.7
64.5
64.5
64.3
2011
64.2
64.2
64.2
64.2
64.2
64.1
63.9
Unfortunately the primary reason for the small .1% decline in the unemployment rate was not that more workers were finding employment in July.
Instead, the real reason the unemployment rate fell in July is that workers previously classified as unemployed were now considered discouraged workers and not unemployed or participating in the labor force.
Workers that normally would be considered unemployed left the labor force and became discouraged workers who are ready and willing to work and have looked for a job in the past, but now are so discouraged that they have stopped looking.
In July the number of discouraged workers rose from 982,000 in June to over 1,119,000 in July an increase of over 137,000.
Series Id: LNU05026645 Not Seasonally Adjusted Series title: (Unadj) Not in Labor Force, Searched For Work and Available, Discouraged Reasons For Not Currently Looking Labor force status: Not in labor force
Type of data: Number in thousands
Age: 16 years and over
Job desires/not in labor force: Want a job now
Reasons not in labor force: Discouragement over job prospects (Persons who believe no job is available.)
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
2000
236
267
258
331
280
309
266
203
253
232
236
269
262
2001
301
287
349
349
328
294
310
337
285
331
328
348
321
2002
328
375
330
320
414
342
405
378
392
359
385
403
369
2003
449
450
474
437
482
478
470
503
388
462
457
433
457
2004
432
484
514
492
476
478
504
534
412
429
392
442
466
2005
515
485
480
393
392
476
499
384
362
392
404
451
436
2006
396
386
451
381
323
481
428
448
325
331
349
274
381
2007
442
375
381
399
368
401
367
392
276
320
349
363
369
2008
467
396
401
412
400
420
461
381
467
484
608
642
462
2009
734
731
685
740
792
793
796
758
706
808
861
929
778
2010
1065
1204
994
1197
1083
1207
1185
1110
1209
1219
1282
1318
1173
2011
993
1020
921
989
822
982
1119
The U.S. economy needs to create between 100,000 to 150,000 jobs each month to keep up with population growth and new entrants into the labor force.
Each month high school and college graduates and drop-outs enter the labor force for the first time.
In addition to jobs filled by new entrants into the labor force, the U.S. economy needs to create between 150,000 to 160,000 new jobs each month to reduce the unemployment rate by just .1% per month.
Therefore the U.S. economy needs to create approximately 300,000 new jobs each month to reduce the unemployment by .1%.
While the total number of new jobs created was estimated to be 117,000 in July this is barely enough to keep up with population growth and not even close to the 300,000 jobs needed to actually reduce the unemployment rate by .1%.
The creation of 300,000 new jobs each month would require a growth rate in the Gross Domestic Product of between 3% to 4% or roughly a 3.5% growth rate.
The U.S economy grew at only a .4% rate for the first quarter on 2011 and 1.3% in the second quarter of 2011.
This is signficantly less than the 3.5% growth rate in real GDP needed to reduce unemployment by .1% each month.
The primary reason the unemployment rate fell by .1% in July instead of remaining flator increasing was workers becoming discouraged at their job prospects and left the labor force.
This is indeed depressing news.
The U.S economy reached a peak in GDP growth in the middle of 2010.
Since then the growth rate of the Gross Domestic Product measure in real terms has steadily declined for four consecutive quarters.
The Weak Obama Recovery has ended and the Great Obama Recession Economy or GORE has started.
The recent correction of over 10% on Wall Street is a leading indicator that the GORE has begun.
When will the recession hit bottom and another recovery begin?
When President Barack Obama is voted out of office in November 2012.
Until then keep looking for a job and do not become discouraged.
The Unemployment Game Show: Are You *Really* Unemployed?
Should the Bureau of Labor Statistics call you, tell them you have been looking for work.
Only then will you be considered unemployed and not be considered a discouraged worker.
A discouraged worker is classified by the Bureau of Labor Statistic as an individual that has left the labor force or is no longer participating.
This is one of the reasons the labor participation rate hit a new low of just 63.7% in July.
I expect the official unemployment rate to go over 10% in the first half of 2012 and then start to decline to just over 9% by election day 2012.
The US Misery Index by President
January 1948 to June 2011
Misery Index = Unemployment rate + Inflation rate
President
Time Period
Start
End
Change
Avg.
Richard M. Nixon
1969-01 – 1974-07
7.80
17.01
9.21
10.57
James E. Carter, Jr.
1977-01 – 1980-12
12.72
19.72
7.00
16.26
Barack H. Obama
2009-01 – 2011-06
7.83
12.76
4.93
10.45
Dwight D. Eisenhower
1953-01 – 1960-12
3.28
7.96
4.68
6.26
Lyndon B. Johnson
1963-11 – 1968-12
7.02
8.12
1.10
6.77
George H.W. Bush
1989-01 – 1992-12
10.07
10.30
0.23
10.68
George W. Bush
2001-01 – 2008-12
7.93
7.49
-0.44
8.11
John F. Kennedy
1961-01 – 1963-10
8.31
6.82
-1.49
7.14
William J. Clinton
1993-01 – 2000-12
10.56
7.29
-3.27
7.80
Gerald R. Ford
1974-08 – 1976-12
16.36
12.66
-3.70
16.00
Ronald W. Reagan
1981-01 – 1988-12
19.33
9.72
-9.61
12.19
Harry S. Truman
1948-01 – 1952-12
13.63
3.45
-10.18
7.88
The OMI or Obama Misery Index, the sum of the unemployment and inflation rates has been rising and is at a new high of over 12.72% and heading for 15%.
This is better than President Jimmy Carter with a Misery Index over 20% in 1980.
President Carter lost to Ronald Reagan in 1980.
The economic recovery or expansion of the U.S. economy will start when the American people become convinced that President Obama cannot be elected to a second term as President of the United States.
This will happen on or before Tuesday, November 6, 2012.
During the Great Depression the rate of unemployment hit a monthly high of 24.9% in March 1933 with about 13 million American unemployed, the month Franklin D. Roosevelt was sworn in as President.
Today there are over 14 million American unemployed as measured by the offical unemployment rate (U-3) and over 25 million Americans seeking a full-time job as measured by the total unemployment rate (U-6).
A popular song in 1933 was Happy Days Are Here Again that may very well become a hit again in 2013!
Barbra Streisand – Happy Days Are Here Again
So long sad times
Go long bad times
We are rid of you at last
Howdy gay times
Cloudy gray times
You are now a thing of the past
Happy days are here again
The skies above are clear again
So let’s sing a song of cheer again
Happy days are here again
Altogether shout it now
There’s no one
Who can doubt it now
So let’s tell the world about it now
Happy days are here again
Your cares and troubles are gone
There’ll be no more from now on
From now on …
Happy days are here again
The skies above are clear again
So, Let’s sing a song of cheer again
Happy times
Happy nights
Happy days
Are here again!
Background Articles and Videos
Why the Meltdown Should Have Surprised No One | Peter Schiff
EAT THE RICH!
What We Believe, Part 1: Small Government and Free Enterprise
Pronk Palisades 
Fed Desperate To Rise Above the Near Zero Fed Funds Rate Target Range — Need Three Months Of 300,000 Plus Per Month Job Creation, Wage Growth and 3% First Quarter 2015 Real Gross Domestic Product Growth Numbers To Jump to .5 – 1.0% Range Fed Funds Rate Target — June 2015 Launch Date Expected — Fly Me To The Moon — Summertime — Launch — Abort On Recession — Videos
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The Pronk Pops Show Podcasts
Pronk Pops Show 430: March 19, 2015
Pronk Pops Show 429: March 18, 2015
Pronk Pops Show 428: March 17, 2015
Pronk Pops Show 427: March 16, 2015
Pronk Pops Show 426: March 6, 2015
Pronk Pops Show 425: March 4, 2015
Pronk Pops Show 424: March 2, 2015
Pronk Pops Show 423: February 26, 2015
Pronk Pops Show 422: February 25, 2015
Pronk Pops Show 421: February 20, 2015
Pronk Pops Show 420: February 19, 2015
Pronk Pops Show 419: February 18, 2015
Pronk Pops Show 418: February 16, 2015
Pronk Pops Show 417: February 13, 2015
Pronk Pops Show 416: February 12, 2015
Pronk Pops Show 415: February 11, 2015
Pronk Pops Show 414: February 10, 2015
Pronk Pops Show 413: February 9, 2015
Pronk Pops Show 412: February 6, 2015
Pronk Pops Show 411: February 5, 2015
Pronk Pops Show 410: February 4, 2015
Pronk Pops Show 409: February 3, 2015
Pronk Pops Show 408: February 2, 2015
Pronk Pops Show 407: January 30, 2015
Pronk Pops Show 406: January 29, 2015
Pronk Pops Show 405: January 28, 2015
Pronk Pops Show 404: January 27, 2015
Pronk Pops Show 403: January 26, 2015
Pronk Pops Show 402: January 23, 2015
Pronk Pops Show 401: January 22, 2015
Pronk Pops Show 400: January 21, 2015
Pronk Pops Show 399: January 16, 2015
Pronk Pops Show 398: January 15, 2015
Pronk Pops Show 397: January 14, 2015
Pronk Pops Show 396: January 13, 2015
Pronk Pops Show 395: January 12, 2015
Pronk Pops Show 394: January 7, 2015
Pronk Pops Show 393: January 5, 2015
Pronk Pops Show 392: December 19, 2014
Pronk Pops Show 391: December 18, 2014
Pronk Pops Show 390: December 17, 2014
Pronk Pops Show 389: December 16, 2014
Pronk Pops Show 388: December 15, 2014
Pronk Pops Show 387: December 12, 2014
Pronk Pops Show 386: December 11, 2014
Pronk Pops Show 385: December 9, 2014
Pronk Pops Show 384: December 8, 2014
Pronk Pops Show 383: December 5, 2014
Pronk Pops Show 382: December 4, 2014
Pronk Pops Show 381: December 3, 2014
Pronk Pops Show 380: December 1, 2014
Story 1: Fed Desperate To Rise Above the Near Zero Fed Funds Rate Target Range — Need Three Months Of 300,000 Plus Per Month Job Creation, Wage Growth and 3% First Quarter 2015 Real Gross Domestic Product Growth Numbers To Jump to .5 – 1.0% Range Fed Funds Rate Target — June 2015 Launch Date Expected — Fly Me To The Moon — Summertime — Launch — Abort On Recession — Videos
Amazing seven year old sings Fly Me To The Moon (Angelina Jordan) on Senkveld “The Late Show”
Forrest Gump JFK “I Gotta Pee” Scene
Fed Decision: The Three Most Important Things Janet Yellen Said
Press Conference with Chair of the FOMC, Janet L. Yellen
Monetary Policy Based on the Taylor Rule
Many economists believe that rules-based monetary policy provides better economic outcomes than a purely discretionary framework delivers. But there is disagreement about the advantages of rules-based policy and even disagreement about which rule works. One possible policy rule would be for the central bank to follow a Taylor Rule, named after our featured speaker, John B. Taylor. What would some of the advantages of a Taylor Rule be versus, for instance, a money growth rule, or a rule which only specifies the inflation target? How could a policy rule be implemented? Should policy rule legislation be considered? Join us as Professor Taylor addresses these important policy questions.
Murray N. Rothbard on Milton Friedman pre1971
On Milton Friedman | by Murray N. Rothbard
Who Was the Better Monetary Economist? Rothbard and Friedman Compared | Joseph T. Salerno
Joseph Salerno “Unmasking the Federal Reserve”
Rothbard on Alan Greenspan
Milton Friedman – Money and Inflation
Milton Friedman – Abolish The Fed
Milton Friedman On John Maynard Keynes
Hayek on Keynes’s Ignorance of Economics
Friedrich Hayek explains to Leo Rosten that while brilliant Keynes had a parochial understanding of economics.
On John Maynard Keynes | by Murray N. Rothbard
Hayek on Milton Friedman and Monetary Policy
Friedrich Hayek: Why Intellectuals Drift Towards Socialism
Capitalism, Socialism, and the Jews
The Normal State of Man: Misery & Tyranny
Peter Schiff Interviews Keynesian Economist Laurence Kotlikoff 01-18-12
Larry Kotlikoff on the Clash of Generations
Extended interview with Boston University Economics Professor Larry Kotlikoff on his publications about a six-decade long Ponzi scheme in the US which he says will lead to a clash of generations.
Kotlikoff also touches on what his projections mean for the New Zealand economy and why Prime Minister John Key should take more attention of New Zealand’s ‘fiscal gap’ – the gap between all future government spending commitments and its future revenue track.
Thomas Sowell on Intellectuals and Society
Angelina Jordan – summertime
Angelina Jordan synger Sinatra i semifinalen i Norske Talenter 2014
Release Date: March 18, 2015
For immediate release
Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
http://www.federalreserve.gov/newsevents/press/monetary/20150318a.htm
Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes
Percent
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 16-17, 2014.
1. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table
2. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. Return to table
3. Longer-run projections for core PCE inflation are not collected. Return to table
Figure 1. Central tendencies and ranges of economic projections, 2015-17 and over the longer run
Central tendencies and ranges of economic projections for years 2015 through 2017 and over the longer run. Actual values for years 2010 through 2014.
Change in real GDP
Percent
Unemployment rate
Percent
PCE inflation
Percent
Note: Definitions of variables are in the general note to the projections table. The data for the actual values of the variables are annual.
Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy
Appropriate timing of policy firming
Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to 1/4 percent will occur in the specified calendar year. In December 2014, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2015, and 2016 were, respectively, 15, and 2.
Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate
Number of participants with projected midpoint of target range or target level
or target level (Percent)
Note: In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.
http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20150318.htm
Janet Yellen Isn’t Going to Raise Interest Rates Until She’s Good and Ready
The key words in Janet L. Yellen’s news conference Wednesday were rather pithy, at least by central bank standards. “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” Ms. Yellen, the Federal Reserve chairwoman, said.
With this framing, Ms. Yellen was putting her firm stamp on the policy of an institution she has led for just over a year — and making clear that she will not be boxed in. Her words and accompanying announcements conveyed the message that the Yellen Fed has no intention of taking the support struts of low interest rates away until she is absolutely confident that economic growth will hold up without them.
Ms. Yellen’s comments about patience versus impatience were part of that dance. But the dual message was even more powerful when combined with other elements of the central bank’s newly released information, which sent the signal that members of the committee intend to move cautiously on rate increases.
By eliminating the reference to “patience,” Paul Edelstein, an economist at IHS Global Insight, said in a research note, “The Fed did what it was expected to do.”
“But beyond that,” he added, “the committee appeared much more dovish and in not much of a hurry to actually pull the trigger.”
Fed officials’ forecasts of how high rates will be at year’s end for 2015, 2016 and 2017 all fell compared to where they were in December. They marked down their forecast for economic growth and inflation for all three years, implying that the nation’s economic challenge is tougher and inflation risks more distant than they had seemed a few months ago.
Particularly interesting was that Fed officials lowered their estimate of the longer-run unemployment rate, to 5 to 5.2 percent, from 5.2 to 5.5 percent. With joblessness hitting 5.5 percent in February, that implied that policy makers are convinced the job market has more room to tighten before it becomes too tight. Fed leaders now forecast unemployment rates in 2016 and 2017 that are a bit below what many view as the long-term sustainable level, which one would expect to translate into rising wages.
In other words, they want to run the economy a little hot for the next couple of years to help spur the kinds of wage gains that might return inflation to the 2 percent level they aim for, but which they have persistently undershot in recent years.
Apart from the details of the dovish monetary policy signals Ms. Yellen and her colleagues sent, it is clear she wanted to jolt markets out of any feeling that policy is on a preordained path.
At times over the last couple of years, the Fed had seemed to set a policy course and then go on a forced march until it got there, regardless of whether the jobs numbers were good or bad, or whether inflation was rising or falling. That is certainly how it felt when the Fed decided in December 2013 to wind down its quantitative easing policies by $10 billion per meeting, which it did through the first nine months of 2014 with few signs of re-evaluation as conditions evolved.
In her first news conference as chairwoman a year ago, Ms. Yellen had suggested that rate increases might be on a similar preordained path by saying that she could imagine rate increases “around six months” after the conclusion of quantitative easing. (That comment increasingly looks to have been a rookie mistake, and she later backed away from it.)
There are likely to be plenty of twists and turns in the coming months. After this week’s meeting, Ms. Yellen reinforced the message she has been trying to convey that the committee really will adapt its policy to incoming information rather than simply carry on with the path it set a year ago.
If the strengthening dollar and falling oil prices start to translate into still-lower expectations for future inflation, the Fed will hold off from rate rises — and the same if wage gains and other job market indicators show a lack of progress.
Conversely, if the job market recovery keeps going gangbusters and it becomes clear that inflation is going to rise back toward 2 percent, Ms. Yellen does not want to be constrained by language about “patience.”
“This change does not necessarily mean that an increase will occur in June,” Ms. Yellen said, “though we cannot rule that out.”
She has now bought herself some latitude to decide when and how the Fed ushers in an era of tighter money. Now the question is just how patient or impatient American economic conditions will allow her to be.
http://www.nytimes.com/2015/03/19/upshot/janet-yellen-isnt-going-to-raise-interest-rates-until-shes-good-and-ready.html?_r=0&abt=0002&abg=1
Taylor rule
John B. Taylor
In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point. This aspect of the rule is often called the Taylor principle.
The rule of was first proposed by John B. Taylor,[1] and simultaneously by Dale W. Henderson and Warwick McKibbin in 1993.[2] It is intended to foster price stability and full employment by systematically reducing uncertainty and increasing the credibility of future actions by the central bank. It may also avoid the inefficiencies of time inconsistency from the exercise ofdiscretionary policy.[3][4] The Taylor rule synthesized, and provided a compromise between, competing schools of economics thought in a language devoid of rhetorical passion.[5] Although many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, research shows that the rule has advanced the practice of central banking.[6]
As an equation
According to Taylor’s original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:
In this equation,
is the target short-term nominal interest rate (e.g. the federal funds rate in the US, the Bank of England base rate in the UK), 
is the rate ofinflation as measured by the GDP deflator, 
is the desired rate of inflation, 
is the assumed equilibrium real interest rate, 
is the logarithm of real GDP, and 
is the logarithm of potential output, as determined by a linear trend.
In this equation, both
and 
should be positive (as a rough rule of thumb, Taylor’s 1993 paper proposed setting 
).[7] That is, the rule “recommends” a relatively high interest rate (a “tight” monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low interest rate (“easy” monetary policy) in the opposite situation, to stimulate output. Sometimes monetary policy goals may conflict, as in the case of stagflation, when inflation is above its target while output is below full employment. In such a situation, a Taylor rule specifies the relative weights given to reducing inflation versus increasing output.
The Taylor principle
By specifying
, the Taylor rule says that an increase in inflation by one percentage point should prompt the central bank to raise the nominal interest rate by more than one percentage point (specifically, by 
, the sum of the two coefficients on 
in the equation above). Since the real interest rate is (approximately) the nominal interest rate minus inflation, stipulating 
implies that when inflation rises, the real interest rate should be increased. The idea that the real interest rate should be raised to cool the economy when inflation increases (requiring the nominal interest rate to increase more than inflation does) has sometimes been called the Taylor principle.[8]
During an EconTalk podcast Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the interest rate. If inflation were to rise by 1%, the proper response would be to raise the interest rate by 1.5% (Taylor explains that it doesn’t always need to be exactly 1.5%, but being larger than 1% is essential). If GDP falls by 1% relative to its growth path, then the proper response is to cut the interest rate by .5%.[9]
Alternative versions of the rule
While the Taylor principle has proved very influential, there is more debate about the other terms that should enter into the rule. According to some simple New Keynesian macroeconomic models, insofar as the central bank keeps inflation stable, the degree of fluctuation in output will be optimized (Blanchard and Gali call this property the ‘divine coincidence‘). In this case, the central bank need not take fluctuations in the output gap into account when setting interest rates (that is, it may optimally set
.) On the other hand, other economists have proposed including additional terms in the Taylor rule to take into account money gap[10] or financial conditions: for example, the interest rate might be raised when stock prices, housing prices, or interest rate spreads increase.
Empirical relevance
Although the Federal Reserve does not explicitly follow the Taylor rule, many analysts have argued that the rule provides a fairly accurate summary of US monetary policy under Paul Volcker and Alan Greenspan.[11][12] Similar observations have been made about central banks in other developed economies, both in countries like Canada and New Zealand that have officially adopted inflation targeting rules, and in others like Germany where the Bundesbank‘s policy did not officially target the inflation rate.[13][14] This observation has been cited by Clarida, Galí, and Gertler as a reason why inflation had remained under control and the economy had been relatively stable (the so-called ‘Great Moderation‘) in most developed countries from the 1980s through the 2000s.[11] However, according to Taylor, the rule was not followed in part of the 2000s, possibly leading to the housing bubble.[15][16] Certain research has determined that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules.[17]
Criticisms
Athanasios Orphanides (2003) claims that the Taylor rule can misguide policy makers since they face real-time data. He shows that the Taylor rule matches the US funds rate less perfectly when accounting for these informational limitations and that an activist policy following the Taylor rule would have resulted in an inferior macroeconomic performance during the Great Inflation of the seventies.[18]
See also
References
External links
http://en.wikipedia.org/wiki/Taylor_rule
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