Prior to the 2008 Global Financial Crisis, the Federal Reserve Board relied on a little-known but useful guideline that economists called “The Taylor Rule.”
We thought it was time to dust off the Taylor Rule, shed some light on what it says – and discuss what has happened since the Fed abandoned its earlier useful guidelines.
First, what are Taylor’s rules? John Taylor, a professor at Stanford University, introduced this formula in 1993, which sets a certain level of interest rates for the Federal Reserve based on the rate of inflation and how strong the economy is. This mathematical formula provides an accurate level of where the Fed’s benchmark interest rate should be.
As you may know, the Fed’s benchmark interest rates are extremely low in historical terms. Yes, the Fed recently raised its rate by a quarter point – but it still stands at 0.25-0.50%.
The fact that the Federal Reserve has been lazy for the past six months, when inflation is high and high – now at a 40-year high – is probably the grave of former Fed Chairman Paul Volker.
Mr. Volker was widely known for his success as chairman of the Fed in a successful battle to end the high levels of inflation seen in the United States in the late 1970s and early 1980s.
So, where does the Taylor Rule say that the Fed’s benchmark interest rate should be now?
The Fed’s interest rate should be above 5.0%, not below 1%! It’s like sleeping on the Fed wheel.
Not only that, after US central bankers dropped their playbooks in the last 14 years, the size of the US balance sheet has exploded to record heights and now stands at $ 8.9. Trillion – with a “t” USD. Before the 2008 crisis, the Fed’s balance sheet was about $ 870 billion. It is not surprising that inflation has skyrocketed. The US government has printed money like never before in history and the Fed is sitting on its hands on interest rates.
Precious Metals: A safe haven in this unexpected time
When you can’t rely on the Fed to follow predictable rules, individual investors must take the financial future into their own hands.
The price of precious metals has risen this year as investors, large and small, turn to gold and silver to protect and hedge their assets. The gin of inflation has been taken out of the bottle. The Fed knew better, but they still failed to act quickly. When it comes to your finances and your financial future, there is nothing more important than making a decision that will protect your hard-earned money. Do you own enough gold?
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