Today, we present a guest post written by David Papell and Ruxandra Prodan, Professor and Associate Instructional Professor of Economics at the University of Houston.

The Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate (FFR) at 5.25 – 5.5 percent in its November 2023 meeting. While the September 2023 Summary of Economic Projections (SEP) projected a range between 5.5 and 5.75 percent by the end of 2023, it clear that the Committee will wait before deciding whether to end the rate hiking cycle or to have one more rate increase at a subsequent meeting.

There is widespread agreement that the Fed fell “behind the curve” by not raising rates when inflation rose in 2021, forcing it to play “catch-up” in 2022. “Behind the curve,” however, is meaningless without a measure of “on the curve.” In the latest version of our paper, “Policy Rules and Forward Guidance Following the Covid-19 Recession,” we use data from the SEP’s from September 2020 to June 2023 to compare policy rule prescriptions with actual and FOMC projections of the FFR. This provides a precise definition of “behind the curve” as the difference between the FFR prescribed by the policy rule and the actual or projected FFR. We analyze four policy rules that are relevant for the future path of the FFR in the post:

The Taylor (1993) rule with an unemployment gap is as follows,

where R_t is the level of the short-term federal funds interest rate prescribed by the rule, π_t is the inflation rate, π^LR is the 2 percent target level of inflation, U^LR_t is the 4 percent rate of unemployment in the longer run, U_t is the current unemployment rate, and r^LR_t is the ½ percent neutral real interest rate from the current SEP.

Yellen (2012) analyzed the balanced approach rule where the coefficient on the inflation gap is 0.5 but the coefficient on the unemployment gap is raised to 2.0.

The balanced approach rule received considerable attention following the Great Recession and became the standard policy rule used by the Fed.

These rules are non-inertial because the FFR fully adjusts whenever the target FFR changes. This is not in accord with FOMC practice to smooth rate increases when inflation rises. We specify inertial versions of the rules based on Clarida, Gali, and Gertler (1999),

where p is the degree of inertia and  is the target level of the federal funds rate prescribed by Equations (1) and (2). We set p as in Bernanke, Kiley, and Roberts (2019). R_t-1 equals the rate prescribed by the rule if it is positive and zero if the prescribed rate is negative.

Figure 1 depicts the midpoint for the target range of the FFR for September 2020 to September 2023 and the projected FFR for December 2023 to December 2026 from the September 2023 SEP. Following the exit from the ELB to 0.375 in March 2022, the FFR rose to 5.375 in September 2023 and is projected to rise to 5.625 in December 2023 before falling to 4.875 in December 2024, 3.875 in December 2025, and 2.875 in December 2026. The figure also depicts policy rule prescriptions. Between September 2020 and September 2023, we use real-time inflation and unemployment data that was available at the time of the FOMC meetings. Between December 2023 and December 2026, we use inflation and unemployment projections from the September 2023 SEP. The differences in the prescribed FFR’s between the inertial and non-inertial rules are much larger than those between the Taylor and balanced approach rules.

Figure 1. The Federal Funds Rate and Policy Rule Prescriptions. Panel A. Non-Inertial Rules

Policy rule prescriptions are reported in Panel A for the non-inertial Taylor and balanced approach rules. They are not in accord with the FOMC’s practice of smoothing rate increases when inflation rises. The prescriptions for the two rules are identical at the ELB through March 2021. The FOMC fell behind the curve starting in June 2021 when the prescribed FFR increased from the ELB of 0.125 to 2.625 for the Taylor rule and to 0.375 for the balanced approach rule while the actual FFR stayed at the ELB. The policy rule prescriptions sharply increased through 2021 and peaked in March 2022 to 7.875 for the Taylor rule and 8.125 for the balanced approach rule when the FFR first rose above the ELB to 0.375. The gap also peaked in March 2022 at 750 basis points for the Taylor rule and 775 basis points for the balanced approach rule. The gap narrowed considerably between March 2022 and September 2023 as the FFR rose from 0.375 to 5.375 while the Taylor rule prescriptions fell to 6.125 and the balanced approach rule prescriptions fell to 6.625. Looking forward, the gap between the FFR projections and the policy rule prescriptions reverses in December 2023 and the FFR projections are above the policy rule prescriptions through December 2026.

Figure 1. The Federal Funds Rate and Policy Rule Prescriptions. Panel B. Inertial Rules

Panel B reports the results for the inertial Taylor and balanced approach rules. They are much more in accord with the FOMC’s practice of raising the FFR slowly when inflation rises. The prescriptions for the two rules are identical at the ELB through March 2021 and rise to 0.375 for the Taylor rule in June 2021. The FOMC fell behind the curve starting in September 2021 when the prescribed FFR increased to 0.875 for the Taylor rule and 0.625 for the balanced approach rule while the actual FFR stayed at the ELB. The gap between the policy rule prescriptions and the FFR peaked in March 2022 at 200 basis points when the prescribed FFR was 2.325 for both rules while the FFR first rose above the ELB to 0.375.

The Fed is no longer behind the curve. The gap narrowed steadily and, in September 2023, the FFR was equal to the inertial balanced approach rule prescription and 25 basis points above the inertial Taylor rule prescription. As of the November 2023 meeting, it is unclear whether the FOMC will follow the prescriptions in the September 2023 SEP and raise the FFR to 5.625 or leave it unchanged at 5.375 at the December 2023 meeting. If the FOMC raises the FFR to 5.625, it will be 25 basis points above the balanced approach rule prescription and 50 basis points above the Taylor rule prescription. If the FOMC leaves the FFR unchanged at 5.375, it will be equal to the balanced approach rule prescription and 25 basis points above the Taylor rule prescription.

The inertial rules prescribe a much smoother path of rate increases from September 2021 through June 2023 than that adopted by the FOMC. If the Fed had followed the inertial Taylor or balanced approach rule instead of the FOMC’s forward guidance, it could have avoided the pattern of falling behind the curve, pivot, and getting back on track that characterized Fed policy during 2021 and 2022. Looking forward, the FFR projections from the September 2023 SEP are generally 25 basis points above the policy rule prescriptions through June 2025, equal to the policy rule prescriptions through March 2026, and 25 basis points below the policy rule prescriptions through December 2026. The current and projected FFR is in accord with prescriptions from inertial policy rules.

This post written by David Papell and Ruxandra Prodan.

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Iconic and essential retailers have been marching into bankruptcy court this year as issues related to supply chain disruptions, rising inflation and other financial difficulties pushed many into Chapter 11.

Giant retailer Rite Aid on Oct. 15 filed Chapter 11 as it has struggled financially for many years competing against Walmart WMT, Costco COST, CVS CVS and Walgreens Boots Alliance WBA drug retailer Walgreens. Tough competition, however, wasn't what pushed Rite Aid over the edge, as potential liability from a Department of Justice civil lawsuit, which it filed against the company in March 2023, forced Rite Aid to file.

Related: Essential retailer closing more stores in bankruptcy

In its lawsuit, the DOJ alleged that Rite Aid's pharmacists inappropriately filled opioid prescriptions, contributing to the opioid epidemic by “repeatedly filled prescriptions for controlled substances with obvious red flags" and it "intentionally deleted internal notes about suspicious prescribers.” The debtor is hoping to negotiate a favorable settlement in bankruptcy that won't cost it billions. The company has already identified 178 stores that it plans to close to cut costs.

Upscale furniture maker Mitchell Gold + Bob Williams revealed it was having financial trouble in late August and unexpectedly closed its 27 stores across 14 states and multiple Canadian provinces on its way to filing Chapter 11. The company was unable to secure adequate debtor-in-possession financing, which prompted Judge Laurie Selber Silverstein of the U.S. Bankruptcy Court of Delaware to subsequently force the retailer into Chapter 7 liquidation.

Restaurant operators file Chapter 11

Restaurants are also having a tough time this year. Several fast-food restaurant franchisees have faced economic distress from a number of issues such as labor needs, economic woes and changes in consumer behavior. Burger King operators Meridian Restaurants and Toms King filed Chapter 11 this year blaming high costs and slow sales, Restaurant Dive reported. Hardee's restaurant operator Summit Restaurant Holdings with 106 units also filed bankruptcy in May and either closed or sold off its restaurants.

Some struggling restaurant chains are able to close underperforming locations without filing bankruptcy. In June, vegan/vegetarian fast-casual restaurant chain Veggie Grill closed six of its restaurant locations in California citing reduced demand for its fast-casual dining offering from a shift to hybrid work models, the company's CEO T.K. Pillan said in an email to Patch. A review of the company's website shows that it still operates 12 locations in California, two in Oregon, two in Washington and one in Massachusetts.

Vegetarian fast-food chain files for bankruptcy

Boston-based vegetarian fast-food restaurant chain Clover Food Lab on Nov. 3 filed for Chapter 11 Subchapter 5 bankruptcy in the U.S. Bankruptcy Court for District of Delaware to reorganize its business as its sales have not fully recovered from the effects of the Covid pandemic, according to its website.

In addition to lower than expected sales, the company in court papers said that high rent for its locations and inadequate funding as a result of the failure of Silicon Valley Bank contributed to the chain's distress, WBUR reported. The restaurant chain had planned to raise capital to expand in New England and into New York but the fallout from the failure of Silicon Valley Bank led its financing plans to collapse.

High rents and low sales at three of its locations led the company to seek lease concessions from its landlords, which was unsuccessful and forced the company to file bankruptcy.

"COVID changed everything for restaurants like us," the company said in a statement on its website. "The way we eat, drink, work, and get together has shifted substantially and, while Clover has seen a steady recovery in sales (and the creation of a whole new part of Clover with our meal box program) our sales are still below pre-pandemic levels. So, we’ve decided to use Chapter 11 Subchapter 5 bankruptcy  to reorganize the company."

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“The proposed NOD/SCID model, with its accelerated ovarian aging, holds particular value as it will enable the observation of ovarian changes within a shorter timeframe.”

Credit: 2023 Marchante et al.

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