wabmester
Thinks s/he gets paid by the post
- Joined
- Dec 6, 2003
- Messages
- 4,459
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.)
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.)