Some Members of Congress, dissatisfied with the Federal Reserve’s (Fed’s) conduct of monetary policy, have looked for alternatives to the current regime.1 H.R. 5018 would trigger congressional and GAO oversight when interest rates deviated from a Taylor rule. This In Focus provides a brief description of the Taylor rule and its potential uses.
What Is a Taylor Rule?
Normally, the Fed carries out monetary policy primarily by setting a target for the federal funds rate, the overnight inter-bank lending rate. The Taylor rule was developed by economist John Taylor to describe and evaluate the Fed’s interest rate decisions. It is a simple mathematical formula that, in the best known version, relates interest rate changes to changes in the inflation rate and the output gap. These two factors directly relate to the Fed’s statutory mandate to achieve “maximum employment and stable prices.” The best known version of this rule is:
Date of Report: July 9, 2014
Number of Pages: 2
Order Number: IF00024
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