Taylor’s rule: stressin’ and obsessin’ about somebody else is no fun. Wait, that’s Taylor Swift’s rule. So, um, just let the haters keep on hatin'.
Stanford University economist John Taylor’s rule, which is the high-SAT-score “Taylor’s rule,” tells the Federal Reserve what to do with interest rates depending on how the economy is performing. When inflation is high and/or we’re at or above full employment, the Fed should raise interest rates. When the opposite is true, the Fed should lower interest rates.
There’s actually a formula for it, and it goes like this:
Taylor’s ideal rate = CIR + 0.5 (GDPe – GDPt) + 0.5 (Ie – It)
In this formula, CIR is our current interest rate, GDPe is the expected growth rate of our GDP, or gross domestic product, GDPt is our long-term growth rate, Ie is our expected inflation rate, and It is a scary clown...and, uh...also our long-term inflation rate. Pretty handy, right? Just plug in some numbers, and boom—we’ve got ourselves an interest rate.
Or do we? Some critics of Taylor’s rule (which is also called just plain “Taylor rule,” FYI) say it’s not all that helpful when the economy experiences a big shake-up, like the 2008 subprime mortgage crisis. But the critics of those critics say that if the Federal Reserve had observed Taylor’s rule before 2007-08, that crisis might’ve been a lot less of a crisis.
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Finance: What is the Federal Open Market...15 Views
finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]
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