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Monetary Policy

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As of this writing, the target federal funds rate remains at 1%, where it has been since June 2003. A low rate in itself does not necessarily signify easy money or an accommodative policy stance, but other measures currently support that interpretation. The real federal funds rate (calculated as the actual funds rate minus the inflation rate) has hovered around zero since late 2001. The fed funds rate has also stayed well below a popular benchmark provided by the Taylor rule, which posits that the Federal Open Market Committee chooses the target rate as a balanced response to weakness and inflation. The form of this rule depends on the weights assigned to inflation and output and on the assumed inflation target, but since mid-2002, the rate has fallen well below what the rule would have predicted, even assuming the rather high inflation target of 4%.

Suggested citation: "Monetary Policy," Federal Reserve Bank of Cleveland, Economic Trends, no. 04-05, pp. 04-05, 05.01.2004.

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