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March 5, 2014

A Better Rule for Predicting Fed Policy

“Adding job growth to monetary policy models that rely on the unemployment rate alone make them better predictors of Federal Reserve policy over time, a Cleveland Fed paper released Tuesday finds.”

“There is a perennial debate among economists, highlighted in Tuesday’s edition of Grand Central, about whether to pursue “rules-based” policies or opt for a more flexible approach.”

“In particular, economists argue over whether the so-called Taylor rule– which prescribes how central banks should adjust short-term interest rates according to several economic variables–is appropriate, and which of its many incarnations tells the best story.”

“Enter Charles Carlstrom and Saeed Zaman, economists at the Cleveland Fed. They say the problem with Taylor rules is that they do not account for either economic growth or employment gains. If adjusted for that flaw, the authors say, the rule’s ability to predict the course of Fed actions over a prolonged period jumps to 67%, up from just 49% for jobless rate-based Taylor rules.”


Read full Wall Street Journal article here.

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