The Cleveland Fed projects interest rates based on various rules.
Please consider Simple Monetary Policy Rules by the Cleveland Fed.
March 6 Data
2026 Q2 Estimate
- Taylor (1993) rule: 3.89
- Core inflation in Taylor (1999) rule: 3.72
- Inertial rule: 3.84
- Alternative r* rule: 3.97
- Forward-looking rule: 3.68
- Low weight on output gap rule: 3.88
The article discusses seven rules, but I dropped the “First Difference Rule” because it blew the chart scale with a forecast over 12.53 percent for 2028 Q1.
12.5 percent seems. Let’s discuss the widely-followed Taylor Rule.
The Taylor Rule is an influential formula developed by economist John Taylor that has shaped monetary policy strategy by linking interest rates to inflation and economic growth targets.
Taylor Rule Components
r = p + 0.5y + 0.5(p – 2) + 2
- r : Nominal federal funds rate (target)
- p : Rate of inflation
- y: Output gap (percent deviation of actual GDP from potential GDP)
- 2: The target inflation rate (2%)
- 2: Assumed equilibrium real interest rate
The formula is nonsense because the output gap and equilibrium interest rates cannot be directly measured.
Second, inflation cannot be accurately measured. Even if inflation it could be accurately measured it’s a lagging indicator.
Third, there is no reason for the Fed to target 2 percent in the first place.
All of the rules have similar issues.
Question of the Day
Q: Can you steer the economy like a truck?
A: Of course not, and the Fed provides ample proof.
Q: How so?
A: By repeatedly blowing bubbles of increasing magnitude over time.
Moreover, the Fed uses asinine measures of inflation in all of its models.
For example, the Fed (economists in general) do not have the price of houses, the cost of homeowners insurance, property taxes, or money supply in their measures of inflation.
They view consumer inflation as the only measure that counts.
Former Fed Chair Ben Bernanke denied there was a housing bubble. He could not see the massive inflation because the Fed does not count housing prices as inflation.
In the real world, inflation matters, not just alleged consumer inflation.
Even if economists could accurately guess the output gap and equilibrium interest rate, the models are all flawed with bad measures of inflation.
When you start off with ridiculous measures of inflation, no model can get things right.
Conclusion
The Fed should not be using models because there should not be a Fed at all.
However, as bad as the Fed may be, politically set interest rates are guaranteed to be worse.
Only the free market has a chance of getting things right.
Related Posts
March 12, 2026: Tame CPI Still Spells Trouble for Fed’s Favored Inflation Measure
A Bloomberg article comments on something I have been discussing for months.
March 13, 2026: Fourth-Quarter GDP Estimate Cut in Half. What Happened?
The BEA knocked its fourth-quarter estimate from 1.4 percent to 0.7 percent. Details below.
March 15, 2026: US Secretary of Energy Says High Gasoline Prices Might Last Weeks
Given that diesel and fertilizer prices are soaring, I have a question.
March 17, 2026: Housing Remains in the Gutter, But Mortgage Rates Are Creeping Back Up
The Wells Fargo Housing Market Index details remain severely depressed.
After falling to 6.0 percent, the MND average 30-year rate shot up to 6.41 percent yesterday. It’s now 6.36 percent.
Current PPI report which was up .5%. Here is a nugget: Food prices rose 2.4% while energy was up 2.3%. Within food, the index for fresh and dry vegetables soared 48.9%.
Excluding volatile food and energy costs, so-called core PPI increased 0.5%.
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sarc
Lets raise rates so people will buy less fresh vegetables. Push them towards eating potato chips, twinkies, and oreo cookies. Cheaper substitutes.
Also, raise rates to force them to use less energy. Have the middle and lower class walk and ride bikes more to reduce energy consumption and prices so DataCenters can use that cheaper energy.
The junk food isnt cheaper. At walmart you can get 5lbs of potatoes, easy to microwave, for $3.50. Bananas, apples, papaya, pineapple, carrots, cabbage, roma tomatoes, oats, peanuts, rice and beans, tuna, chicken, store brand wheat bread are all inexpensive and healthy.
In my view, these rules have become irrelevant. After severing from a sound money system (gold, bretton woods,etc), the initial intention was to emulate a sound money system using various metrics. But here we are where politicians have learned that they can expand the pool of money at will. Since this is a debt based monetary system, backed only by fiat, debt always equals savings. In other words one mans debt is another’s savings. So the game for maintaining the value of ones work output becomes keeping on the savings side of the ledger, which means holding paper claims that get devalued slower than the currency.
In this construct, Inflation at this point is just a measure of the dilution of the currency value. And that is why all these rules are BS.
The ways to get rich:
1) inheritance
2) be at the currency trough ( close to fed/govt, politics)
3) start with capital and ride the paper train (stock market)
4) create something compelling, sell/ IPO it to the mamas and papas, then Do 2)
Everyone else gets a lower standard of living as they get diluted, especially people who have no access to paper trading
The good news is that eventually the game ends and we start over. But until then if you need dollars, gotta play in the paper mill
Wall Street is perfectly happy with the Fed’s sloppy control of the economy. WS makes money on movements and unstable conditions. They don’t want just smooth, steady growth. When things blow up, they get bailed out anyway.
Please stop. It should be obvious to everyone by now that the Fed has become irrelevant. Faith and trust in the old system (Federal Reserve Note) are quickly evaporating. That is the ONLY thing this corrupt group of bankers controls.
Good luck everyone!
“The Cleveland Fed projects interest rates based on various rules.”
On first scan I read vacuous rules. My subconscious may be correct.
PPI came in at a whopping 3.4% YIKES!
https://www.cnbc.com/2026/03/18/ppi-inflation-february-2026.html
Do worry, Trump will find a way to make things even worse.™
Not sure if it can be worse than Biden’s inflation. We live with a Uni-party. It (both parties) like to spend money. Nobody gets reelected pushing tax increases. Most of the budget spending is set by congress. Presidents come and go but many congress people have been there for decades. How come we never point a finger at them.
People blame the FED for our financial woes but many times they are just trying to contain collateral damage created by Congress’s and a standing presidents haphazard spending sprees.
Now….The FED did keep rates artificially low that allowed the Government to go on a spending spree from 2010 to 2022. But most of the time, they are just chasing the 2 year bond rates.
Mish definition of inflation, “Inflation is an increase in money supply and credit, with credit marked to market.” from: If the Velocity of Money Picks Up Will Inflation Soar? – MishTalk
I do not believe the general public perceives inflation as it is defined, rather they just understand it as prices going up without an understanding of the reason. Maybe there should be more discussion of dollar purchasing power erosion and the resulting reduction and therefore confiscation of wealth contained within dollar denominated assets.
Another issue with the dollar changing value is the distortion in valuing dissimilar goods and services. It is a central function of money that works best when the value of the measuring tool constant. The fed by defining their constant prices goal as 2% inflation has contributed to the havoc in our economy in many more ways than just the assured destruction of the dollar’s purchasing power.
President Reagan said to the effect that no country achieved economic wealth and prosperity via trashing their currency. The 2% inflation is trashing our currency at a 2% rate.
Taylor Rule Components: The Key Point is inflation is a “lagging indicator”, and therefore should not be in any equation, unless on the back side to figure out what caused it to occur, and why perhaps.
An unknown point of reference, is not a point of reference. The 2% target has always been a mystery to me, as it’s based on absolutely nothing that I can see, because there is nothing to see, until after the fact. I have always felt that it was to show they know what they are doing, which works for most that hear and see it, but just not in reality. This rule is a wild a#& guess if you ask me…
– For example, the Fed (economists in general) do not have the price of houses, the cost of homeowners insurance, property taxes, or money supply in their measures of inflation. > A perfect example! All key components that must be considered in any equation of this sort imo.
Free Markets are they only true barometer of facts on the ground. Making up numbers that you have little or no control over is BS at best. What happening live is the only real true measure, but would need to be done constantly and consistently to have any chance of being factual for use in any equations imo.
Throw the rules out the window. Inflation has been above 2% for 5 YEARS. That’s quite some derelict of duty. Volker set the precedent of raising rates until inflation submits.
Even if it doesn’t. I never cared for him much. Great point!!
IMO The Taylor rule is indicating short term stagflation. Reality of war indicates another bubble is about to be unleashed…
The “Bubbles” Mish has cited are indeed observable:
The Fed being abolished seems to be a remote possibility so lets look at its present tools:
Bully pulpit: Fedspeakers are always jawboning the markets and participants read every word looking for subtle language shifts.
Interest Rates: This is the most visible and discussed measure of Fed policy. Today the Fed has been lowering rates but the free market interest rates have been rising.
Liquidity: This is the flow that is less seen or discussed. It is the Feds most powerful tool. Recently it has been reversed from tightening (QT) to loosening (QE).
With the BBB and War, War and more War spending of Trump and his minions in congress, we have clear indications of another bubble about to take shape. QE has started already and is barely being talked about as it is only just observable in the Feds balance sheet trend: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Proliferate war spending has started and will stimulate GDP temporarily and debt long term. It takes from the “Real Economy” as it produces ordinance, not infrastructure. The mask of war spending is nothing but a facade economy and the cost of the financial fraud of war is immense over the long term.
We live in interesting times!
If Trump wants a cut, he’ll after wait until the inflationary impulse he unleashed works it way though first. So if he “wins” and goes home some time in April (early May latest), and there’s an inflationary impulse spring thru summer, then cuts can happen in the early fall as the economy goes to sh!t due to aforementioned inflation…seems quite a ways off, but would shoehorn in nicely with mid-terms.
Sick and tired of being FED UP.
Perfect timing, as I was just getting FED UP from reading about it the last 20 minutes. Making policy on guess work, or worse making up the numbers with zero rational, is very frustrating!!
Powell leaving soon,he won’t move.
as today USA debt increased $ 2.8 trln from same day 1 year ago
i think if this sh11it in ME keeps on and oil stays elevated, we are gonna have $ 3.5 trln deficit by end of year!
nice!!!!
Correct, and US debt will likely suffer its second credit downgrade of Trumps second nightmare.
QE has already begun and the liquidity punchbowl is being filled.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
See for yourself! Go to the one year chart to see the clear reversal of QT to QE that the Fed has embarked on.
Add this open ended war to the BBB and you have a dollar disaster in the making!
I agree and the war certainly won’t help that situation out at all. The overall care free spending must stop, as you can’t have it all, no matter how hard you try…
Venezuela defeats Team USA to win World Baseball Classic. Is Iran winning too?
Humorous, but no, Irans infrastructure is getting annihilated and its people subjected to the inhumanity of war on a scale of epic proportion. The bombing of the girls school is only a tiny fraction of the vicious carnage being inflicted by two out of control military dictators.
This is a religious war of choice, not necessity. Another barbaric example of one theocracy against another.
The US constitution prohibits the support or establishment of one religion over another and this prolonged attack is a treasonous violation of the first amendment.
I really hope Trump strips your citizenship and ships your sorry ass to Iran to experience real life under the Regime.
Aww Jojo’s mad enough to show his Nazi colors. It’s OK, boo-boo, we all knew before you came out.
Not humorous, as war is never funny!
Irans infrastructure is getting annihilated by their dead leaders vision of cruelty and death to all. Not necessarily a bad thing. Try living there for a day or two, and if still alive, you will understand what I mean. It’s people subjected to the inhumanity of war on a scale of epic proportion, all because of their leadership vacuum. Stop with the girls school already, that horse has been beaten enough!
The US constitution prohibits the support or establishment of one religion over another, yep, and that’s a terrific thing for our Country, but does not pertain to this particular episode. Wrong tree, in the wrong yard…
The Old Testament tells us the Amalek should be destroyed. God wants total destruction and genocide.
That must have been on right after the Hollywood boondoggle I heard about. Didn’t see either one… which team had professionals under contracts, if not all of them, and which team had youth, unpaid, no contracts, and trying to earn a spot someplace for there hard work. Yeah, no thanks, as I can watch professional sports within my own Country…
When Israel-Trump’s barbaric war triggers a global recession, all the rules will be defenestrated. The Fed will print.
It’s unlikely the Fed is ever going to change, they will always be behind the eight-ball, too slow or too fast or too low or too high. Want to know what the Fed has zero control over?
Gold, silver, bitcoin. As society moves to “alternatives” to the toilet paper called “dollars, euros, yen or yuan” the better off we’ll all be.
Nothing in economics is empirical.
Even the aggregate supply/aggregate demand curves are abstract assumptions.
There is no way to aggregate demand or supply; every actor makes their own relative cut off points, which are often not based on rational perfect knowledge, and are part of a matrix of all other items such an actor might decide to buy or sell.
You and other proponents of removing the FED have said this numerous times over the past but IMO, you have never specified how this would work in a real environment. I don’t believe this would be workable. for example, how would you smooth out short-term fluctuations?
I ran your post through chatGPT and ask for a critique. Here is what it produced:
Thanks for that effort, and I find the Chat information interesting. “Overconfidence” in our monetary policy is spot on! Our entire system tries to run off of this 2% made up number imo. It’s also based on moving data points, which is never accurate as they are moving for a reason.
With that being said, I like the “Don’t throw the baby out with the bath water” approach to the situation. I just don’t know if it can work with a constantly moving target, and data that creates a target too. They are self contradictory I do believe…
Good post to get one thinking for certain!
As taco takes over the fed, since he doesn’t understand economics, unless it puts more money in his pockets, the pressure to lower rates will not subside.
Don’t all Presidents try to have rates lowered? It creates more borrowing, as it cheaper to do so. This pushes people to spend or even invest into the economy. This can in turn help the economy grow. Other than some interest being lost on your money in the bank, it’s an economy booster for certain. This will never change, under our current 2% System imo.
Pres. Reagan (the last halfway honest prez) distinctly supported Paul Volker in raising interest rates (aka: stop printing money) to quench inflation. Inflating steals the value of American’s earnings and savings, transferring it to those who get 1st use of the newly printed money [esp. govt]. It is thievery.
The free market is seeing interest rates rise despite the Fed lowering its funds rate.
The Fed has also reversed QT and injected $110 billion since December third of 2025. This is a clear turn into the QE that will be required as the US is isolated from world trade.
Trade is swinging toward Asia and the Yuan is appreciating strongly as Trump attacks ally after ally with his insane insults and petulant and illegal tariffs. War crimes are not something any nations other than Israel seem to have an appetite for.
The weaponization of the dollar and bizarre behavior of the US is not consistent with being a reliable trading partner. Without international trade the usefulness of the dollar fades and given its massive pending dilution? Another downgrade of US debt is likely.
The Fed is absolutely trapped between pending inflation and the need for another injection of liquidity to keep Trumps economy from imploding.
Interested in your thoughts on this. I agree that the markets are seeing interest rates rise, but the Fed has not lowered its funds rate. At the rate of current borrowing, and the eventual “No” as an answer except the black market.
What’s going to happen? What can be done about it? Can’t print? Can’t erase? Can’t pass on? All the usual suspects got pulled down together as if it was orchestrated. Not advocating that, but damn sure appeared to be imho.
I also agree that The Fed is absolutely trapped between pending inflation and the need for another injection of liquidity to keep Trumps economy from imploding. There is no help unless we sell some Gold I suppose, for a slight reprieve, but then what?
I am having a hard time coming up with anything but sky high interest rates to but groceries on credit, if you can get it. Cars left abandoned and stolen was the theory, and things like that occurring. No money, no credit, no job equals no food. I honestly am struggling with an overall workable out.
Thoughts Frosty? I could use another set of eyes please…
To give you an idea where I went for an example: We (Government Entity) take college kids with autos in debt, and if you can get an ROI or better, then we take it off their hands. We would have to find the buyer, and perhaps a rental car company, or auction house. Debt gone, broke even, and life goes on…
The economy doesnt need any more money. Inflation is already too high and thats due to too much money. They shouldve continued QT. Trying to keep bubble asset prices inflated is idiotic and turning this country into a banana republic.