Using an Improved Taylor Rule to Predict When Policy Changes Will Occur
A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way—by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.
What’s Up in Inflation? Shelter and OER
The Consumer Price Index (CPI) increased 0.1 percent from December to January according to the Bureau of Labor Statistics (BLS). Cold weather across the country contributed to the increase in the CPI, as the electricity and natural gas components of the index both rose sharply. But more generally, an important factor behind recent inflation readings has been an upward trend in inflation in the shelter component of the CPI.
Is a Neighborhood’s Unemployment Rate Influenced by Its Metro Area?
When people compare employment conditions around the country, they usually think in terms of large regions like the Midwest and the West Coast or cities like Cleveland and Pittsburgh. But employment conditions vary widely within major metropolitan area as well. Even if a metro area experiences rising average levels of employment and income, the changes in specific neighborhoods in that metro area may be well above or below that average.