Some economists have demonstrated an interesting approach to financial calculations. They turned to the so-called Taylor Rule, according to which the US key interest rate should stay at 4.5%. However, reality and expectations do not always meet. At present, the situation is far from what brave analysts had hoped for.
According to the Taylor Rule, the benchmark rate is calculated on the basis of inflation and unemployment in the United States. For a long time, the Fed was using this rule, but in recent years, it has revised the former methods of calculation. According to experts, the regulator has started betraying these principles.
Curiously, there was nothing bad that happened. Instead, the US economy managed to stabilize. Analysts and market participants now expect the Federal Reserve to lower the key rate at the meeting in March or by early summer. Analysts consider this scenario to be optimistic. In late 2023, most expected such an outcome.
The Taylor Rule is a kind of indicator that the US central bank has been using since the 1990s. It indicates where the interest rate should be, taking into account inflation and unemployment. According to Chief Economist at Apollo Torsten Slok, the fact that the key rate has long been in the range of 5.25%–5.50% is a valid argument for cutting it as soon as possible. The Taylor Rule suggests that it is more logical to lower the rate this spring.
Earlier, a currency strategist at Apollo wondered whether the interest rate could be 9% given the Taylor Rule. At present, the indicator confirms that the interest rate has been too high for a long time. Nevertheless, Wall Street analysts and Fed officials have cautioned against expecting an early rate cut. Moreover, some FOMC members allow a further rise in the key rate amid the risk of unexpected reversals in the US economy.
