Robin Harding Taylor Rules & the Fed

The question often arises of which monetary policy rule the Fed uses in its analysis (I’m going to avoid the much more involved question of which monetary policy rule it should use).

In their latest commentary, the economics team at MF Global note:

“We realize Fed officials do not mechanically follow a Taylor Rule in setting monetary policy, and expectations for growth are being pared a little, but, based on the original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.”

John Taylor himself has also repeatedly highlighted the famous 1993 version of his rule as opposed to the equally famous version he discussed in 1999.

As for what the Fed looks at, from the historic FOMC transcripts you can see that every meeting it gets a list like this:

That includes both original formulations of the rule and quite a few more. We also have the version of the rule that chairman Ben Bernanke presented at the AEA in early 2010:

…which uses the original rule with forecast inflation.

My impression is that most Fed policymakers regularly look at a range of policy rules but most are inclined towards those that use forecast parameters and place a greater weight on the output gap than inflation.

The one thing I am confident of is that the original 1993 version does not play a huge role in policymaking. Indeed, that is self evident, because if it did then policy would already be a lot tighter.