FIXED INCOME & CENTRAL BANKING // MODEL 06 Tier-1 OIS & Fed Funds Rate Engine

Central Bank Policy Path & Taylor Rule Terminal

Deterministic monetary reaction function modeling, FOMC 30-day Fed Funds futures meeting probability decomposition, G10 policy stance comparison, and dynamic Taylor Rule policy gap sensitivity.

Effective Fed Funds (EFFR) 4.33% Target Range: 4.25% - 4.50%

Classical Taylor (1993) 4.38% α = 0.50, β = 0.50

Balanced Approach (1999) 4.63% α = 0.50, β = 1.00

Market 1Y Implied Rate 3.65% Priced -72 bps Easing

Reaction Function Parameters

Current Policy Rate (Target Midpoint) 4.375%

Current upper-lower bound center: 4.375%

Equilibrium Real Rate ($r^*$) 1.00%

NY Fed HLW estimate: ~1.00% to 1.25%

Core Inflation Target ($\pi^*$) 2.00%

Statutory price stability benchmark: 2.00%

Current Core Inflation ($\pi_t$) 2.75%

12-Month Trailing Core PCE Price Index

Output Gap ($y_t - y^*$) +0.50%

Real GDP relative to CBO potential capacity

Policy Inertia Parameter ($\rho$) 0.75

Clarida-Galí-Gertler interest rate smoothing

Historical & Macro Scenarios

Derive Output Gap from Okun's Law

Multi-Variant Taylor Rule Policy Prescriptions Deterministic Formulations

Classical (1993) 4.38% Equal 0.5/0.5 weight on inflation & output gap.

                            Balanced (1999)
                            4.63%
                            Dual Mandate standard (Yellen). Weight 1.0 on output gap.
                        

Inertial (CGG 2000) 4.44% Policy persistence ($\rho = 0.75$) with rate smoothing.

First-Difference (Δi) +0.63% Robust to unobserved $r^*$ and $y^*$. Recommends policy shift.

8-Quarter Forward Policy Trajectory Comparison

Classical (1993)

Balanced (1999)

Inertial Path

Market OIS Implied

FOMC 8-Meeting OIS Market Pricing Matrix

Curve Shift Shock: 0 bps

Decomposing 30-Day Fed Funds Futures ($ZQ$) and Overnight Index Swaps (SOFR OIS) to extract market-implied decision probabilities across the next 8 FOMC meetings.

FOMC Meeting	Implied Rate	Total Easing	Prob. 50 bps Cut	Prob. 25 bps Cut	Prob. Hold	Prob. 25 bps Hike	Distribution

G10 Central Bank Policy Stance Matrix Actual vs. Taylor-Implied Rates

Cross-border comparison of official monetary benchmarks against estimated Taylor Rule equilibrium targets across major developed central banks.

Central Bank	Policy Benchmark	Current Rate	Core Inflation	Target	Output Gap	Est. $r^*$	Taylor Target	Policy Gap	Stance Bias

Macroeconomic Sensitivity & Shock Lab Instantaneous Impulse Tests

Simulate real-world supply and demand shocks to observe immediate changes in the Taylor Rule recommendation and the central bank policy stance.

Institutional Methodology & Mathematical Specification

The reaction functions modeled in this terminal follow peer-reviewed econometric literature from John B. Taylor (1993, 1999), Clarida, Galí, and Gertler (2000), and the Federal Reserve Bank of New York.

Classical Taylor (1993)

$$i_t = r^* + \pi_t + 0.5(\pi_t - \pi^*) + 0.5(y_t - y^*)$$

Equally weights inflation deviations and real output fluctuations. With $r^* = 2\%$ and $\pi^* = 2\%$, this simplifies to $4.0 + 1.5(\pi_t - 2) + 0.5(y_t - y^*)$.

Balanced-Approach (1999)

$$i_t = r^* + \pi_t + 0.5(\pi_t - \pi^*) + 1.0(y_t - y^*)$$

Assigns double the weight to output gap/unemployment, reflecting the statutory dual mandate of the Federal Reserve Act.

Clarida-Galí-Gertler Inertial Smoothing

$$i_t = \rho i_{t-1} + (1 - \rho) i_t^{\text{target}}$$

Captures central bank rate smoothing ($\rho \in [0.70, 0.85]$) to avoid destabilizing commercial banking balance sheets.