Federal Funds Rate

“Currently, nominal GDP is up 6% and the Fed funds rate is at zero. Such a big negative “real” Fed funds rate has only occurred one period, 2002 to 2005, which happens to be when the subprime bubble was pumped up. Zero interest rates are good for equities for now, but not necessarily in the long run.” (Carnegie)

GDP vs Feds Fund Rate

“Taylor Rule – a key metric used to project the appropriate federal funds rate based on changes in growth, inflation, other economic activity, and expectations around those variables. At the worst point of the 2007-2009 financial crisis, with the target federal funds rate already set at the 0.00% – 0.25% range, the Taylor Rule suggested that the appropriate target rate was about -6%. To achieve a negative rate was the whole point of QE; and while a central bank cannot achieve a negative interest-rate target through traditional open-market operations, it can print and buy large amounts of assets on the open market – and the Fed proceeded to do so. By contrast, the Taylor Rule is now projecting an appropriate target interest rate around 2%, but the Fed is goes on pursuing a QE-adjusted rate of around -5%.” (John Mauldin)

Taylor Rule

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