Taylor Rules and Communication
The FOMC statement continues to assert that “monetary policy remains accommodative,” but it is difficult to judge whether or not this is the case. One approach is to calculate what the funds rate would have been in the past under similar conditions. The Taylor rule, which posits that the Federal Reserve sets the funds rate on the basis of inflation and the output gap (deviations of output from potential), provides such a benchmark.
Suggested citation: “Taylor Rules and Communication,” Federal Reserve Bank of Cleveland, Economic Trends, no. 05-09, pp. 05-07, 09.01.2005.