Ever heard of the Taylor Rule?
Not many people have, but the folks at the U.S. Federal Reserve are very familiar with it – and they’d probably prefer that this highly respected guideline for the federal funds rate languish in obscurity.
Basically the Taylor Rule is a mathematical equation based on inflation, output, and other economic measures. It was created in 1993 by John B. Taylor, a renowned economics professor at Stanford University.
Ordinarily, the actual Fed funds rate should track within the range of where the Taylor Rule says it should be.
And for most of the past 30 years, that’s pretty much what’s happened.
But since 2009, the Fed funds rate has diverged from the Taylor Rule – a divergence that’s getting bigger all the time.