FROM THE WSJ: How high could rates go if John Taylor becomes Fed chairman?
The Federal Reserve’s benchmark interest rate would be significantly higher if the 1993 'Taylor rule', named for the Fed chairman contender, were applied
Stanford University professor John Taylor, a contender to become the next Federal Reserve chairman, has repeatedly criticized the central bank by saying it held interest rates too low before and after the financial crisis. But how much higher should rates have been? Quite a bit, according to estimates by economists applying his eponymous “Taylor rule,” a mathematical formula for setting rates based on several economic variables. While there are multiple versions of the rule, the classic 1993 model indicates the Fed’s benchmark federal-funds rate should have started rising sooner and more in the years before the crisis, dipped below zero during the worst of the recession, and started rising in late 2009, according to a tool offered by the Atlanta Fed. In contrast, the Fed held the fed-funds rate near zero from late 2008 until late 2015, and has raised it little since then. Under the Taylor rule, the rate would be between 2.5% and 3% now, more than a percentage point higher than where...
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