Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Controlling Inflation: The Taylor Principle
Old 10-07-2005, 02:45 AM   #1
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Controlling Inflation: The Taylor Principle

I just learned about the Taylor principle. I imagine we might be hearing more about this in the days ahead, as it is what guides the Fed in their fight against inflation. The fed recently signaled that inflation is at the high-end of their comfort zone, and that could mean aggressive tightening. How aggressive?

My understanding is that the Taylor principle says that the fed should increase the nominal rate by more than the difference between expected inflation and their inflation target.

So, for example if their target is around 3%, expected inflation looks like 5%, then they will increase interest rates by more than 2%.

The idea is to make interest rates so attractive to consumers that they save their money, postpone purchases, and thereby bring inflation back in check.

This will be interesting to watch. It might mean a relatively quick rise in rates to over 6%, depending on how much the fed thinks that might dampen economic output, whether the inflationary spike is short-term, and other factors.

Hold on to your hats! (Or consider taking evasive action.)
__________________

__________________
wabmester is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 06:46 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
Re: Controlling Inflation: The Taylor Principle

Three things may temper that policy.
1. Raising intrest rates also slows down business growth, employment
2. Higher interest rates detrimential to those with variable mortage rates and other variable debt
3. Energy costs act as a defacto fed reserve hike or fed government tax precluding those increases.

I must say I like the idea. I have a lot of cash I'm waiting to invest. However, I currently do not have a fixed 30 year mortage - I don't have a house.
__________________

__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 10:23 AM   #3
Full time employment: Posting here.
bosco's Avatar
 
Join Date: Jul 2005
Posts: 987
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by dex
Three things may temper that policy.
1. Raising intrest rates also slows down business growth, employment
2. Higher interest rates detrimential to those with variable mortage rates and other variable debt
3. Energy costs act as a defacto fed reserve hike or fed government tax precluding those increases.

I must say I like the idea. I have a lot of cash I'm waiting to invest. However, I currently do not have a fixed 30 year mortage - I don't have a house.
yes, rising rates cause some pain but inflation is totally devastating to those on fixed income (many pension plans, annuities etc.) I'm sure many of us can remember people in the 70s who thought they were done working, until inflation got into double digits for a few years and cut their legs out from under them.

I say...crank those rates up. Forget 1/4 point increases--let's go for 1/2!. Let's pop this #*$*) housing bubble and see what's on the other side of this lunacy. Besides, if Greenspan lets inflation get out of hand, it encourages irresponsible behavior by the government. If they are allowed to inflate away their debt too easily, they'll just go out and borrow more money to start another war. I say "starve the beast" (to throw Republican dogma back at them). Unfortunately, this beast just steals and borrows other animals' food when it gets hungry, which is also inflationary. Hmmm. Easy to blame Greenspan, but I think the problem resides more with our "elected" officials.

I wonder if Bush's nominee to replace Greenspan will be as qualified as his last nomination to the Supreme Court. Scary thought..... :
__________________
I have an inferiority complex, but it's not a very good one.
bosco is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 10:26 AM   #4
Recycles dryer sheets
 
Join Date: Dec 2003
Posts: 447
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by bosco

I wonder if Bush's nominee to replace Greenspan will be as qualified as his last nomination to the Supreme Court. Scary thought..... :
I am 'reliably' informed that he is going to nominate the guy at H&R Block that does his personal taxes ...

Peter
__________________
Peter is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 11:03 AM   #5
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by bosco
I wonder if Bush's nominee to replace Greenspan will be as qualified as his last nomination to the Supreme Court.
It would be nice to see someone like former US Treasury Secretary Robert Rubin as a replacement.* From what I remember, he did a great job for the US Treasury, he is well respected on Wall Street, and both parties like him.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 11:29 AM   #6
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Controlling Inflation: The Taylor Principle

I think the leading candidate is Ben Bernanke, you know that sweetheart of a guy who came out right after Katrina killed a bunch of people and said "I don't think this storm will have a big economic impact."

I was reading a few fed speeches last night, including a long one of Bernanke. All of these guys are pretty interesting. Bernanke has some wacky ideas about our current account deficit, and all of the fed guys are certain that they are in control of the economy (mostly based on the last 10-years or so of data). And they think you think so too, which is why they think the markets have become less volatile, inflation is tame, and all they need to use is a little rhetoric to keep things in line.

Digging a little deeper, though, it becomes clear that the rely on fairly simple models, and they're not really sure what do in response to an energy price shock.

Anyway, if they pull the trigger on the Taylor Principle, it means that for a while at least, we'll have high inflation coupled with high real interest rates and a slow economy. Not good for bonds (even TIPS), stocks, real estate, or probably anything else besides cash.
__________________
wabmester is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 02:06 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Re: Controlling Inflation: The Taylor Principle

Cash, hey thats me. I have some bucks sitting in my credit union andI cannot figureout what best to do with it (younger son starting college in 1 1/2 years) and E Fund. So maybe will I end up appearing very smart financially to be sitting on this cash.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 02:11 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
I just learned about the Taylor principle.* *I imagine we might be hearing more about this in the days ahead, as it is what guides the Fed in their fight against inflation.* *The fed recently signaled that inflation is at the high-end of their comfort zone, and that could mean aggressive tightening.* *How aggressive?

My understanding is that the Taylor principle says that the fed should increase the nominal rate by more than the difference between expected inflation and their inflation target.
Do you maybe have a link that might help put this in context with Federal Reserve thinking?

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:02 PM   #9
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by HaHa
Do you maybe have a link that might help put this in context with Federal Reserve thinking?
I recommend reading all of the fed speeches -- plenty of insight if you can filter out the posturing:

http://www.federalreserve.gov/boarddocs/speeches/2005/

But the one that had me chasing down inflation targets and the Taylor principle is this one.

As an aside, everybody should read Bernanke's spiel on the global saving glut for some potential insight into how and why foreign banks keep our economy afloat as well as his thoughts on which countries we should be investing in.
__________________
wabmester is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:07 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by dex
Three things may temper that policy.
1. Raising intrest rates also slows down business growth, employment
2. Higher interest rates detrimential to those with variable mortage rates and other variable debt
3. Energy costs act as a defacto fed reserve hike or fed government tax precluding those increases.
But aren't those three things the whole point of raising rates - to wring excess demand out of the system? *


Quote:
I must say I like the idea. *I have a lot of cash I'm waiting to invest. *However, I currently do not have a fixed 30 year mortage - I don't have a house.

As a "net lender" I have to admit I'm not sorry to see the end of free money. *But I'm scared to death about what a pricking of the real estate bubble is going to do to the rest of my investments. *

__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:27 PM   #11
Recycles dryer sheets
just_hatched's Avatar
 
Join Date: Sep 2005
Posts: 90
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
I recommend reading all of the fed speeches -- plenty of insight if you can filter out the posturing:

http://www.federalreserve.gov/boarddocs/speeches/2005/
Does "posturing" include all of the sentences that are written in Greek?

Anyone know the "Fed -> Simple English" translation site?


__________________
just_hatched is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:38 PM   #12
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,134
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
I recommend reading all of the fed speeches --
--- if you suffer from insomnia.

__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:39 PM   #13
Full time employment: Posting here.
TargaDave's Avatar
 
Join Date: Jul 2005
Posts: 588
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
Anyway, if they pull the trigger on the Taylor Principle, it means that for a while at least, we'll have high inflation coupled with high real interest rates and a slow economy. Not good for bonds (even TIPS), stocks, real estate, or probably anything else besides cash.
Well, if you want to go one step further, even "dollars" are risky according to the serious bears out there. Whether the dollar has more to fall is anyones guess but the bears will tell you to diversify into foreign currencies as well as that ever so popular bear sweetheart, gold. At $474 that might take some guts. Even today gold is the investment everyone loves to hate.
__________________
TargaDave is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 03:46 PM   #14
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by REWahoo!
if you suffer from insomnia.
Some of these are really page turners. I couldn't put Bernanke down!

For insomnia, I recommend a primer on macroeconomics:

Mac 101

Quote:
Originally Posted by TargaDave
even "dollars" are risky according to the serious bears out there.
According to Bernanke, our dollar is being propped up on at least a mid-term basis by many foreign central banks. No idea on how or when it'll unwind.
__________________
wabmester is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 06:40 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
Not good for bonds (even TIPS), stocks, real estate, or probably anything else besides cash.
Hmm, so yesterday TIPS are good for the upcoming financial scenario and cash is silly. Today TIPS might be bad, cash is good.

Might be nice to separate the wildly different opinions by at least a week or so...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 06:53 PM   #16
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by ()
Hmm, so yesterday TIPS are good for the upcoming financial scenario and cash is silly.* Today TIPS might be bad, cash is good.

Might be nice to separate the wildly different opinions by at least a week or so...
That's the difference between you and me. When I see new compelling evidence, it can change my view. You, on the other hand.... Well, let's just say that I expect your tombstone to read "Admit it, wab, that Inspiron 1000 is much better than the Altair 8800 everybody was boasting about in 1975. Ha, I was right!" That's OK, though. You're a marketing guy. You can't help it.

Anyway, *IF* the fed aggressively raises rates such that real rates rise faster than inflation, then TIPS will take a hit, but they'll still perform better than other bonds in an inflationary environment. I don't know how aggressively the fed will act. I'm holding onto my TIPS.
__________________
wabmester is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-07-2005, 07:23 PM   #17
Recycles dryer sheets
 
Join Date: Jun 2005
Posts: 213
Re: Controlling Inflation: The Taylor Principle

It's almost the weekend and we're talking about inflation. I think I hear Greg's PC warming up.
__________________
mikew is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-08-2005, 11:30 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
Anyway, *IF* the fed aggressively raises rates such that real rates rise faster than inflation, then TIPS will take a hit, but they'll still perform better than other bonds in an inflationary environment.* * I don't know how aggressively the fed will act.* *I'm holding onto my TIPS.
I Bonds! Put your low yielding ones right back to the feds and grab that higher real yield.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-11-2005, 09:03 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by wab
That's the difference between you and me. When I see new compelling evidence, it can change my view.
At least my view isnt usually wrong...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Controlling Inflation: The Taylor Principle
Old 10-11-2005, 10:44 PM   #20
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Controlling Inflation: The Taylor Principle

Quote:
Originally Posted by ()
At least my view isnt usually wrong...
OK, let's bury the hachet. I'll stop talking about your extra-large butt if you stop making up bogosities and defending them to the death.

Besides, sticks and stones can break my bones, but your comebacks are WEEEEEAK!

__________________

__________________
wabmester is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Inflation and market performance Rich_by_the_Bay FIRECalc support 6 07-08-2006 06:56 AM
Panama Inflation Arif FIRE and Money 7 04-19-2006 08:39 AM
Go with TIPs or am I crazy? Mister Bill FIRE and Money 147 06-14-2005 10:25 AM
Inflation and CPI sgeeeee FIRE and Money 6 01-21-2005 08:18 PM
Retiree Inflation Rate? mccl FIRE and Money 4 05-13-2004 08:51 AM

 

 
All times are GMT -6. The time now is 02:09 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.