Watch what they do, not what they say

Tim Duy says that the amount of Fed tightening projected over the coming year can be described by a simple Taylor Rule.

This is different from saying that the level of the fed funds rate can be explained with a Taylor Rule. The difference, roughly, is that the first claim makes no allowance for error correction, while the latter does. Because Taylor-type rules fail near the zero bound, the latter statement could not be true. And it isn’t.

Let’s put this in English. The decline of the unemployment rate has been steeper than expected by the Fed and yet the Fed’s best guess of the LEVEL of interest rates a year out, which is correlated with its level today, has gone DOWN. A lot.  The Fed has claimed to follow the logic of a (difference) Taylor Rule, but — predictably — has not followed through.

The Fed is not following a Taylor Rule. These days, I mention this not to be dovish, but just reality-based.  In these troubled times, you gotta stand up for reality. *

* Maybe there is buried somewhere deep in the literature — or maybe just beyond my casual glance — a caveat conceding my obvious point here. But I think academics are obliged to lead with their main point, as opposed to the opposite of their main point.  This came up in the context of  a debate last week and I think it applies here too. I could be wrong, but it explains my impatience with this sort of stuff.  The experience of the past decade is not consistent with the Fed following a simple Taylor Rule. So why imply that?  A more informative opening would be: for the past decade the Fed has pretended to follow a (difference) Taylor Rule in prospect but has very wisely decided not to follow through.  That might not necessarily be true, but it would be a more informative summary of the argument presented.