MONETARY POLICY REPORT: MARCH 2024 41
these rules, along with a “balanced approach
(shortfalls)” rule, which responds to the unemployment
rate only when it is higher than its estimated longer-
run level.
2
All of the simple rules shown embody key
design principles of good monetary policy, including
the requirement that the policy rate should be adjusted
by enough over time to ensure a return of in ation to
the central bank’s longer-run objective and to anchor
longer-term in ation expectations at levels consistent
with that objective.
All ve rules feature the difference between in ation
and the FOMC’s longer-run objective of 2percent. The
ve rules use the unemployment rate gap, measured
as the difference between an estimate of the rate of
unemployment in the longer run (u
t
LR
) and the current
unemployment rate; the rst-difference rule includes
the change in the unemployment rate gap rather
than its level.
3
All but the rst-difference rule include
an estimate of the neutral real interest rate in the
longerrun (r
t
LR
).
4
rule is based on a rule suggested by Athanasios Orphanides
(2003), “Historical Monetary Policy Analysis and the Taylor
Rule,” Journal of Monetary Economics, vol. 50 (July), pp.983–
1022. A review of policy rules is provided in John B.Taylor
and John C. Williams (2011), “Simple and Robust Rules for
Monetary Policy,” in Benjamin M. Friedman and Michael
Woodford, eds., Handbook of Monetary Economics, vol.3B
(Amsterdam: North-Holland), pp. 829–59. The same volume
of the Handbook of Monetary Economics also discusses
approaches to deriving policy rate prescriptions other than
through the use of simple rules.
2. The balanced-approach (shortfalls) rule responds
asymmetrically to unemployment rates above or below their
estimated longer-run value: When unemployment is above
that value, the policy rates are identical to those prescribed by
the balanced-approach rule, whereas when unemployment
is below that value, policy rates do not rise because of
further declines in the unemployment rate. As a result, the
prescription of the balanced-approach (shortfalls) rule has
been less restrictive than that of the balanced-approach rule
since 2022:Q1.
3. Implementations of simple rules often use the output
gap as a measure of resource slack in the economy. The rules
described in gureA instead use the unemployment rate gap
because that gap better captures the FOMC’s statutory goal
to promote maximum employment. Movements in these
alternative measures of resource utilization tend to be highly
correlated. For more information, see the note below gureA.
4. The neutral real interest rate in the longer run (
r
t
LR
) is
the level of the real federal funds rate that is expected to be
consistent, in the longer run, with maximum employment
and stable in ation. Like u
t
LR
, r
t
LR
is determined largely by
nonmonetary factors. The rst-difference rule shown in
gureA does not require an estimate of r
t
LR
, a feature that is
touted by proponents of such rules as providing an element of
As part of their monetary policy deliberations,
policymakers regularly consult the prescriptions
of a variety of simple interest rate rules without
mechanically following the prescriptions of any
particular rule. Simple interest rate rules relate a
policy interest rate, such as the federal funds rate, to a
small number of other economic variables—typically
including the current deviation of in ation from its
target value and a measure of resource slack in the
economy.
Since 2021, in ation has run above the Federal
Open Market Committee’s (FOMC) 2percent longer-
run objective, and labor market conditions have been
tight. Although in ation remains elevated, it has eased
considerably over the past year, and labor supply and
demand have come into better balance. Against this
backdrop, the simple monetary policy rules considered
in this discussion have called for elevated levels of the
federal funds rate over 2021, 2022, and the rst half of
2023, but the rates prescribed by these rules have now
declined to values close to the current target range for
the federal funds rate at 5¼ to5½percent. In support
of its goals of maximum employment and in ation at
the rate of 2percent over the longer run, the FOMC has
maintained the federal funds rate at 5¼ to5½percent
since July while continuing to reduce its holdings
of Treasury securities and agency debt and agency
mortgage-backed securities.
Selected Policy Rules: Descriptions
In many economic models, desirable economic
outcomes can be achieved over time if monetary
policy responds to changes in economic conditions
in a manner that is predictable and adheres to some
key design principles. In recognition of this idea,
economists have analyzed many monetary policy
rules, including the well-known Taylor(1993) rule, the
“balanced approach” rule, the “adjusted Taylor(1993)”
rule, and the “ rst difference” rule.
1
FigureA shows
1. The Taylor(1993) rule was introduced in John B.Taylor
(1993), “Discretion versus Policy Rules in Practice,” Carnegie-
Rochester Conference Series on Public Policy, vol. 39
(December), pp. 195–214. The balanced-approach rule was
analyzed in John B. Taylor (1999), “A Historical Analysis of
Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy
Rules (Chicago: University of Chicago Press), pp. 319–41. The
adjusted Taylor(1993) rule was studied in David Reifschneider
and John C. Williams (2000), “Three Lessons for Monetary
Policy in a Low-In ation Era,” Journal of Money, Credit and
Banking, vol. 32 (November), pp. 936–66. The rst-difference
Monetary Policy Rules in the Current Environment
(continued on next page)