Tornado Alley (PROG)

[StephanieVanbryce]

When Will The Fed Tighten?



According to the Federal Reserve Bank of Atlanta investors now expect the Fed to start raising rates next summer. But why?

Yes, the latest news suggests improving growth prospects. But we are very deep in the hole, and it would take a lot of growth to get us to anything like full employment. Put it this way: suppose that you assume that the slump has raised the NAIRU to something like 6 percent (which I don’t believe); even so, it would take about five years of growth at 4 percent to get us down to that level.

And if you apply any kind of simple Taylor rule to even the optimistic forecasts I’m seeing, it implies zero rates through to the end of 2012 and beyond. [ http://krugman.blogs.nytimes.com/2010/08/22/the-taylor-rule-and-the-bond-bubble-wonkish/ ]

Are markets pricing in the idea that Ron Paul will bully the Fed into tight money? Or are they just not thinking it through?

http://krugman.blogs.nytimes.com/2010/12/17/when-will-the-fed-tighten/