Taylor Rule: Fed’s Gone Dangerously Off Track

Ever heard of the Taylor Rule?

Not many people have, but the folks at the U.S. Federal Reserve are very familiar with it – and they’d probably prefer that this highly respected guideline for the federal funds rate languish in obscurity.

Basically the Taylor Rule is a mathematical equation based on inflation, output, and other economic measures. It was created in 1993 by John B. Taylor, a renowned economics professor at Stanford University.

Ordinarily, the actual Fed funds rate should track within the range of where the Taylor Rule says it should be.

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And for most of the past 30 years, that’s pretty much what’s happened.

But since 2009, the Fed funds rate has diverged from the Taylor Rule – a divergence that’s getting bigger all the time.

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— EconMatters

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