The Fed Needs To Take A Look At Itself: WSJ Editorial By Levy And Plosser (Taylor Rule Implied Target Rate Of 12.07%, Current Rate At 4%)

Confounded Interest ^ | 12/13/2022 | Anthony B. Sanders

[Kaiser8408a]

Paul Revere and the Raiders said it best about The Federal Reserve. Take a look at yourself.

Mickey Levy of Berenberg Capital and Charles Plosser wrote a great op-ed in the Wall Street Journal entitled “The Federal Reserve Needs a Hard Look in the Mirror.” Here is a Fed Reserve St Louis paper by Levy and Plosser entitled “The Murky Future of Monetary Policy.”

Abstract

In August 2020, the Federal Reserve unveiled its new strategic framework. One major objective of the Fed was to address its concerns over the potential consequences for the conduct of monetary policy when the policy rate was constrained by its effective lower bound. This article concludes that there are significant flaws in the new strategy and that it encourages a more discretionary approach to monetary policy and increases the risks of policy errors.

I attended a speech by macoeconomist Gershon Mandelker at the National Association of Realtors where he called on the Federal Reserve to follow some observable rule rather than the complex (or seat of the pants) approach to monetary policy.

With today’s inflation report (core inflation YoY of 6%) results in a Taylor Rule estimate of The Fed Funds Target Rate of 12.07%. We are struggling to reach 5% as a “terminal” Fed target rate (currently at 4% and likely to rise 50 basis points at tomorrow’s Fed meeting).

The matrix of CPI and unemployment under the Taylor Rule shows that The Fed’s target rate isn’t at even 5% for any relevant combination of core CPI (inflation) and unemployment rate.

Here is Treasury Secretary and former Fed Chair Janet Yellen laughing at those who want some kind of observable Fed rule.

[Kaiser8408a]

The Fed is out of control.

[cgbg]

Big banks love free money.

Free money is when loans from the Fed are lower than the inflation rate.

[EnderWiggin1970]

I would love to be wrong, but when I compare historical bouts of inflation and what it took to get them under control, it looks like we are going to see rates go much, much higher. Is there an objective reason to believe it will be easier this time around?

The only major difference I've seen someone call out is that government spending is a much larger portion of the economy now than in the past. But that makes things worse, not better, as it is largely shielded or ignores inflationary effects, so the effort to tamp down demand-side pressures has to hit the private sector that much harder.

[SaxxonWoods]

The FED is fine, the writer is ignoring half of what the FED is doing, as usual.

[central_va]

There is no need to crash the economy with sky high interest rates to slow inflation.

[AAABEST]

Bump.

Everything you wrote - plus our global economic and scarcity issues are creating a s**t-storm.

Meanwhile, our clown leaders are doubling down on making food and energy scarce - while flooding us with currencies that are devaluing.

This is NOT a “bubble.”

[blackdog]

Can’t there be an algorithm indexing the fed Rate to inflation, employment, PPI, and import / export data? I mean the theater of such simple metrics triggering such simplistic measures is rather elementary. Removing the actors from this and linking it to actual real-time data makes a whole lot more sense and removes politics from the stage.

[griswold3]

Mark

[M Kehoe]

Welcome to FR.

5.56mm