1. Taylor tells all…
American Taylor Fritz may have bowed out in the Quarter finals of the Australian Open. But Taylors rule is still in play in the US.
The Taylor rule was developed by economist John Taylor in 1993. The Fed uses the Taylor rule framework to understand what the Fed funds rate should be based on inflation and economic growth. Because of the sharp decline in inflation over the past six months, Taylors model says the Fed funds rate should be 4.5% today, rather than 5.5%.
Source: Bloomberg, Apollo Chief Economist (January 2024)
Note: Neutral real rate = 0.5, inflation target rate = 2, and NAIRU = 4.
2. Money pile…
Since the Fed started raising rates in March 2022, the amount of cash in money market funds has increased from $4.5 trillion to $6 trillion. If Taylor’s rule holds, and the Fed does start cutting rates over the coming quarters, get ready for cash to flow back into other asset classes, and the economy.
Source: Bloomberg, Apollo Chief Economist (January 2024)
3. Results riddle…
We were caught off guard when going through the Humana result this week. Humana is an American health insurance company. And seem to believe their ‘value creation initiatives’ can be excluded from their earnings…
Source: Humana (January 2024)