Taylor and His Rule Are Not What the Fed Needs

There’s widespread speculation that Stanford University professor John Taylor is being considered by President Donald Trump to replace Janet Yellen as chair of the Federal Reserve in February. Appointing Taylor could be a mistake, both for the the Trump administration and the U.S. economy.

Taylor’s academic credentials aren’t in question. He helped develop New Keynesian macroeconomics, which is now the main type of macroeconomic theory used by almost all central banks. New Keynesian economics says that a central bank such as the Fed can boost aggregate demand and increase employment by cutting interest rates, but that this will cause inflation to accelerate. This concept, which is a modification of a classic idea called the Phillips curve, says that the Fed has to engage in a balancing act -- keeping interest rates high enough to avoid runaway inflation, but low enough to minimize unemployment. That balancing act is actually written into the Fed’s charter, in the form of the so-called dual mandate.