The Taylor Rule
Monetary policy can often be described as a rule or strategy for changing the federal funds rate in response to inflation and other indicators of real economic activity. Obviously, no rule can capture every variable that the Federal Open Market Committee considers in setting the fed funds rate. Nevertheless, a rule that roughly describes past behavior can provide a benchmark for setting policy. An extremely simple rule, in which the central bank responds only to past inflation, tracks movements in the fed funds rate fairly closely, as shown in the upper left chart, although large misses are not uncommon.
Suggested citation: "The Taylor Rule," Federal Reserve Bank of Cleveland, Economic Trends, no. 03-02, pp. 06-07, 02.01.2003.