Analysis: Taylor's Law Shows Fed Is "Seven Beats Slow" in Cutting Rates
2024-08-02 19:49:58
The classic "Taylor's Law" model suggests the current Fed base rate is about 1.7 percentage points above its reasonable level, which equates to seven 25 basis point rate cuts, agency analysis said. The previously released July non-farm payrolls data showed the unemployment rate rising to 4.3%. The latest inflation data showed the so-called core PCE price index, which excludes food and energy items, a favored measure of the Fed, rose 2.6% year-on-year in June. Fed officials assume a "neutral real rate" of 0.8% and a long-term unemployment rate of 4.2%. Taken together, the model calculates the level of interest rate at 3.65%, while the current effective federal funds rate is about 5.3%.
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