When making investments on behalf of our clients our views are being shaped by monetary policies both in the U.S. and abroad.
The Taylor Rule
A number of years ago John Taylor, a Stanford professor and noted economist, came up with a formula to guide how our central bank should set and change their interest rate policy in response to changing economic environments in light of fulfilling a dual mandate of low inflation and maximum employment. The formula, known as “The Taylor Rule” is based on the long term equilibrium real interest rate plus adjustments for the difference between current inflation measures and the central bank’s inflation rate target, as well as the current level of economic growth (GDP) compared to economic growth associated with full employment. Although few central banks have an explicit dual mandate, when the Taylor Rule is applied to the central bank interest rate policies of developed and developing countries the conclusions are pretty clear. Developed and developing countries have had interest rate policies that are more accommodative (interest rates lower than they should be) than is necessary to stabilize prices and promote full employment. This accommodative policy has been the case for much of the last decade.READ MORE