Tailoring Taylor.

Markets moved on Monday when news hit that Trump had a “good” (whatever that means in the context of Trump meetings) pow wow with John Taylor.

Specifically, Taylor was said to have “made a favorable impression” on the President last week during an hour-long interview at the White House. I guess that means Taylor gave him a bowl of ice cream, turned on Fox & Friends then proceeded to juggle for Trump who squealed and clapped.

“Trump gushed about Taylor after his interview,” one source told Bloomberg.

Because Taylor and the rule that bears his name would presumably have rates higher than where they are now, this was “hawkish” news and the dollar and yields moved accordingly.

But on Tuesday morning, SocGen’s Kit Juckes has some counterpoints for you to consider. To wit:

On the basis of a 2% neutral real rate, and a 4% NAIRU, the Fed is a long way behind the curve, which may be reason enough to think that a Taylor Fed would be more hawkish. On the other hand, lower the NAIRU (which may be reasonable given what we’ve seen from the labour market data in recent years) and you can get that estimate down. A 3% NAIRU throws out a 1.5% Funds rate, for example. And if Professor Taylor really wants to fine-tune his rule, he can head down the road from Stanford to the San Francisco Fed, 36 miles away, and have a chat with Stanford alumni and head of the San Francisco Fed, John Williams. He developed an estimate of neutral rates with Thomas Laubach, which moves over time and is currently at -0.2%. Plug Williams-Laubach’s R* into Bloomberg’s TAYL function with a 4% NAIRU and rates ‘should’ be 0.5%. Now cut NAIRU to 3% and we’re at -0.75%. By way of indication, I’ve plotted some variants of this below, though I haven’t adjusted the Wiliams-Laubach R* all the way through the time series so they are only relevant in the recent past. The lesson is clear however — the rule’s just a rule, it’s how it’s used that matters.

Yes, “it’s how it’s used that matters.” Or you know, how you “tailor” it.