Former Fed Economist Blasts Current Policy. Taylor calls 2011 the year of "4, 3, 2, 1". First quarter: 4% growth. Second quarter: 3%. Third quarter: 2%. Final quarter of 2011: you guessed it, 1%. It's important to note that Taylor seems to assume that QE 3 (money-printing/debt-monetization) will end after the current round, known as QE2. While we disagree, and view QE3 as near-inevitable, we understand any reluctance by Mr. Taylor to hint at further easing, as it could cause quite the uproar. The Taylor Rule he created is a pillar of macroeconomic policy, though he says it is being misused by Bernanke & co today. But Taylor says the Fed is misinterpreting his rule, and venturing into dangerous territory. Taylor says temporary tax cuts, and Fed easing are the only thing keeping consumers spending. The irony of John Taylor, who created the Taylor Rule (used by the Fed to gauge monetary policy) saying Bernanke and Co. are misusing his work is apparent to Tyler Durden over at Zero Hedge (highlighting mine): The expertist has so many basic reasons based on whats their interprate the economic pillars takes as the indications. But, the real business mostly such make difference due its indicating the real power of people economics. It might be temporary looks as directed by the expertist whom have the supporters of the huge corporation which is take a role for making the market changes. Fortunately its not the basic economic development or growth, its just such tricky play. This one just whom take part for more having the suporters. Is it the gamic.... ???

Former Fed Economist Blasts Current Policy

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Posted by Adam Sharp - Thursday, March 3rd, 2011

John Taylor is a rare breed of economist. The Federal Reserve can't discredit him, as his work remains a pillar of their ideology. He disagrees with much of what they're doing today (like printing money to fund the deficit), and says we're headed straight into another recession.

Yet Bernanke continues use to forecast sunshine and daisies. And misuse the rule Mr. Taylor created (more after the clip).

Taylor calls 2011 the year of "4, 3, 2, 1". First quarter: 4% growth. Second quarter: 3%. Third quarter: 2%. Final quarter of 2011: you guessed it, 1%.

It's important to note that Taylor seems to assume that QE 3 (money-printing/debt-monetization) will end after the current round, known as QE2. While we disagree, and view QE3 as near-inevitable, we understand any reluctance by Mr. Taylor to hint at further easing, as it could cause quite the uproar.

The Taylor Rule he created is a pillar of macroeconomic policy, though he says it is being misused by Bernanek & co today.

Talking points from the .

But Taylor says the Fed is misinterpreting his rule, and venturing into dangerous territory.

Taylor says temporary tax cuts, and Fed easing are the only thing keeping consumers spending.

The irony of John Taylor, who created the Taylor Rule (used by the Fed to gauge monetary policy) saying Bernanke and Co. are misusing his work is apparent to Tyler Durden over at Zero Hedge (highlighting mine):

Something funny transpired over the the past two years in the Fed's interpretation of the critical Taylor rule, which Bernanke refers to in every testimony before Congress or the Senate: John Taylor, the creator of the rule, and Zero Hedge's nomination for Fed chairman (in as much as we need a Federal Reserve) said Bernanke is wrong in his interpretation of the rule, and if he had a proper interpretation the Fed Chairman should already be hiking rate.

Yet leave it to Bernanke to believe he knows better what the rule is supposed to mean....than even its creator. From the WSJ: "Stanford University professor John Taylor, an outspoken critic of the Federal Reserve in recent years, has a new complaint: He says Fed Chairman Ben Bernanke is misrepresenting Mr. Taylor’s eponymous rule on interest rates." A brief reminder on the Taylor rule, which has been presented numerous times on Zero Hedge before: "The Taylor Rule offers a simple formula that economists often use as a guide for the appropriate level of the federal funds rate.

The formula provides changes in interest rates depending on the level of inflation and the output gap, which is the difference between actual gross domestic product and the economy’s potential output. Depending on how you define the rule (for instance if you give the output gap a lot of weight in the formula or just a little, or if you use a projected inflation rate or actual inflation) you can come up with different interpretations of whether interest rates should be high, low or even negative in a theoretical world." And an odd dilemma appears when one uses the original version of the Taylor rule as presented in 1993 or its 1999 revision: they provide totally different results: the first one says the Fed is wrong, the second one validates QE. Yet here is Taylor himself: "I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way." So is the entire US monetary policy based on a rule derivative that is not even endorsed by its creator? The answer is a resounding yes.

Yet Bernanke and the Fed continue to use outdated models, and misinterpret the useful ones they do have. Time for a change.