CQG News | Assessing Monetary Policy Through The Taylor Rule
Summary
• Where rates go once the Federal Reserve reaches a point of neutral policy will be a key point for the jobs-inflation trade-off • The Taylor Rule today, and for some time in the past, has been suggesting the Fed needs to start removing accommodation There is considerable talk about the trade-off between inflation and jobs as the Federal Reserve removes policy accommodation. When short-term interest rates are moved aggressively higher, above the prevailing rate of inflation and well-above long-term bond yields, then yes, the economy may enter a recession and unemployment is likely to rise before inflation recedes. In 2022, in this first stage of raising rates and shrinking its balance sheet, the Fed is still running an accommodative policy. In policy circles this trade-off is embodied in what is known as the Taylor Rule, which argues that the Fed should raise rates in line with a simple formula for an assumed inflation-jobs trade-off. The Taylor Rule is now interpreted as only one element guiding the Fed as to the direction, but not necessarily the magnitude, of monetary policy.
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