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John Taylor

12/14/2012 05:07:00 PM
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I think that John Taylor's latest post reveals a little something about his character. The Federal Reserve recently announced a new policy rule stating that it will keep interest rates at 0% to 0.25% until the unemployment rate falls to 6.5%, and in addition released a projection stating that this would most likely happen in 2015. The previous policy rule had simply stated that interest rates would remain low until 2015, or as needed. In otherwords, the only change in the Fed's stance is that it has illuminated greater detail, which helps to reduce uncertainty about exactly when the Fed will halt QE3.

That's why it is so strange for Taylor to be complaining that this change represents "more monetary policy uncertainty." Sure, he comes up with two generic reasons why they would increase policy uncertainty. The first one is that it involves the Fed's balance sheet. Though he says that it "implies a gigantic increase in the size of the Fed’s balance sheet," but actually, it doesn't--when compared to the previous policy stance of the Fed, it is quite ambiguous whether the new rule increases, decreases, or doesn't change the balance sheet relative to the previous policy. The second reason he cites is that it implies the interest rate would be "far below levels that created good performance in the past." Again, this isn't really true. A number of good estimates of the Taylor rule--his own invention--suggest that if the Fed were to follow the same policy now as it has in the past, interest rates should be negative. Now, the Fed is constrained by the zero-lower bound, meaning that uncertainty arising from deviations from the Taylor rule are not necessarily a result of policy.

What all this shows is the classic problem of academia and talking heads. Taylor's espoused philosophy of "rules-based policy" gives him a cheap weapon to bludgeon policy makers with impunity. There is uncertainty associated with any policy whatsoever, which means that Taylor's view is flexible enough to let him attack any policy he wants. It is a cheap tactic by a man who isn't faced with actually directing any policy.