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Monday, January 2, 2012


One of my forecasts for last year that I got wrong was that I expected the Federal Reserve to raise interest rates sooner than most people expected. No only did they not raise rates, but they made it clear that rates will probably stay low for an “extended period.”
A few years ago, Professor Greg Mankiw of Harvard drew up a very basic rule of where the Fed funds rate ought to be. The rule is:
Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)
Thanks to the magic of FRED, you can easily plug those numbers in and generate your own graph. Much to my surprise, the Mankiw rule has just ticked into positive territory after three years of signaling negative interest rates.
Does this mean the Fed will soon follow? I don’t know but it may catch the attention of something even more powerful — the bond market.

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