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  • Description: We show federal funds rates from 7 simple monetary policy rules based on 3 sets of forecasts for economic conditions.
  • Why so many rules? Examining a variety of rules is helpful because there is no agreement on a single “best” rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future.
  • Why 3 forecasts? Looking across multiple economic forecasts helps to capture some of the uncertainty surrounding the economic outlook and, by extension, the outlook for monetary policy.
Federal Funds Rates Based on Simple Monetary Policy Rules for a Given Forecast
Date (YYYY.Q format)
ForecastRule2022.42023.42024.4
SPFTaylor (1993) rule8.643.86
Core inflation in Taylor (1999) rule7.353.68
Inertial rule3.234.18
Alternative r* rule3.204.08
Forward-looking rule5.16
First-difference rule4.92
Low weight on output gap rule2.49
CBOTaylor (1993) rule5.863.422.83
Core inflation in Taylor (1999) rule5.874.083.22
Inertial rule2.933.833.61
Alternative r* rule2.903.743.49
Forward-looking rule3.523.132.75
First-difference rule3.234.985.11
Low weight on output gap rule2.302.522.56
FRBC BVARTaylor (1993) rule8.486.564.97
Core inflation in Taylor (1999) rule7.346.024.36
Inertial rule3.225.154.94
Alternative r* rule3.205.054.82
Forward-looking rule6.815.514.45
First-difference rule6.9722.8133.96
Low weight on output gap rule2.693.824.23
SummaryMaximum8.6422.8133.96
Median3.524.084.29
Minimum2.302.522.56

Sources: Federal Reserve Bank of Cleveland calculations based on data and/or forecasts from Federal Reserve Bank of Philadelphia; Congressional Budget Office; Federal Reserve Bank of Cleveland; Bureau of Economic Analysis; Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; Federal Reserve Bank of New York; and Haver Analytics.

Notes: The table takes the forecasts for inflation and economic activity from each forecaster as given and then computes the federal funds rate based on each simple monetary policy rule. SPF uses the forecasts from the Survey of Professional Forecasters. CBO uses the forecasts from the Congressional Budget Office. FRBC BVAR uses the forecasts from a small Bayesian vector autoregression model maintained by Cleveland Fed staff. Because the Cleveland Fed staff consult a variety of forecasting models, the FRBC BVAR model forecast does not necessarily represent the official forecast of Cleveland Fed staff or the president of the Cleveland Fed. Some values are missing due to limited forecast availability. All federal funds rates are expressed as percentages and are quarterly averages.

Background

Description

Simple monetary policy rules typically provide a relationship between the central bank’s policy rate—which, for the United States, has been the federal funds rate target—and a relatively small number of indicators on real economic activity and inflation. Monetary policymakers often compare and contrast the federal funds rates implied by different simple monetary policy rules, use simple rules as an input in the decision-making process, and use simple rules to help communicate decisions to the public. (For one example, see here.)

Examining a variety of rules is helpful because there is no agreement in the research literature on a single “best” rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future. Looking across multiple economic forecasts helps to capture some of the uncertainty surrounding the economic outlook and, by extension, monetary policy prospects.

We look at the federal funds rates coming from 7 simple rules.

  • Taylor (1993) rule
  • Core inflation in Taylor (1999) rule
  • Inertial rule
  • Alternative r* rule
  • Forward-looking rule
  • First-difference rule
  • Low weight on output gap rule

Forecasts for economic activity come from 3 sources.

  • Survey of Professional Forecasters
  • Congressional Budget Office
  • Cleveland Fed BVAR model