Friday, July 7, 2017


The Fed and Mankiv

I was unaware there is an actual formula the Fed uses to set rates. It was developed by a Professor Greg Mankiw of Harvard after reading some economic entrails and it is this:

The Rate = 8.5 + (1.4) (I - V) where "I" is the core inflation and "V" the unemployment rate.

They have been following this formula closely--until now.

The Fed’s preferred inflation gauge is core PCE.  (The "core" PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices.)
PCE is up 1.7% since this time last year, and the unemployment rate is 4.3%. So according to Mankiw’s formula, Rate = 8.5 + (1.4) (1.7 - 4.3) we would expect a fed funds rate of 4.86% right now.
But it is 1 to 1.25.

So what has changed, the formula or the rigor?

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