(O’)Taylor Rules!

I posted a chart on twitter earlier that I thought was worth sharing. The Taylor rule, having been a frequent topic of discussion this summer through early October as a reason that the Fed needed to embark upon further quantitative easing, seems to have fallen out of the discussion entirely. Goldman notably in their QE3 call, projected additional easing based on their 9.2% year end unemployment rate and further deflationary pressure, neither of which has come to fruition.

With inflation near target and the continued improvement of unemployment rate the Fed Funds rate dictated by the Taylor rule has breached positive territory for the first time since 2008. Currently the argument for further quantitative easing has to revolve around the belief that the Fed chooses to intervene in the mortgage market.

Here is the 30 year chart of Fed Funds and the Taylor rule based on core PCE inflation (currently at 1.7%) and a 5.5% natural rate of unemployment.