What John Taylor’s Rule Could Mean for the Fed
How Markets Would React to a Powell, Taylor Fed
With Stanford University economist John Taylor under consideration by U.S. President Donald Trump to run the Federal Reserve, investors are zeroing in on a mathematical equation Taylor designed in the early 1990s to guide the setting of interest rates. Judging from movements in financial markets, many investors have concluded that Taylor’s rule, if implemented as policy, would cause the central bank to raise rates at a faster pace. But that may not be the right conclusion.
At Carnegie Mellon University in Pittsburgh in 1992, Taylor first outlined his ideas for how inflation and growth figures can be used to set interest rates. He elaborated in a 1993 paper on how a central bank’s benchmark interest rate should be adjusted based on inflation and economic growth. (Unemployment is now often used as a substitute for growth.) So simple is the formula that Taylor once inscribed it on his business cards, and central banks around the world use it informally to guide policy. Taylor is often mentioned as a possible future winner of the Nobel Prize for economics.