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09.06.18

Update on fed funds rates based on 7 simple monetary policy rules: Cleveland Fed

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Our tool also allows users to customize their own simple policy rule and forecast

Looking at the federal funds rates coming from seven simple monetary policy rules and three economic forecasts -- based on data and forecasts available as of August 30, 2018 -- Federal Reserve Bank of Cleveland researchers find that the median federal funds rate across the policy rules and forecasts rises from 2.19 percent in 2018:Q3 to 3.26 percent in 2020:Q3.

"Compared with the forecasts available in mid-May, the current projections call for a slightly lower path for the unemployment rate and a slightly higher path for inflation," says Edward Knotek, a senior vice president and economist at the Cleveland Fed. "As a result, the median federal funds rate path across these simple policy rules and forecasts has moved up and now rises to 2.55 percent by the end of 2018 and to 3.41 percent by the end of 2019. These median funds rates are 4 and 22 basis points, respectively, higher than their values last quarter."

Simple monetary policy rules provide a relationship between a central bank's policy rate and a relatively small number of indicators of inflation and real economic activity. Monetary policymakers often use simple policy rules, like the Taylor rule, as an input into their decision-making. However, there are many different simple rules, and there is no agreement on a single "best" rule. The chart below highlights differences among the latest funds rates coming from the simple policy rules and forecasts examined by Cleveland Fed researchers.

The Cleveland Fed's webpage, Simple Monetary Policy Rules, presents detailed results from the researchers' analysis and a spreadsheet so users can customize their own simple monetary policy rule and forecast. The results are updated quarterly, and users can receive e-mail notifications when the updates are posted. Subscribe here.

Federal funds rates based on 7 simple rules


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