Assessing Monetary Policy Through The Taylor Rule


  • 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. For small changes in short-term interest rates, however, there may be hardly any trade-off at all.

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. This is what happened in 1980-82, 1989-91 and 2006-08 among other periods.

In 2022, in this first stage of raising rates and shrinking its balance sheet, the Fed is still running an accommodative policy. During this phase of accommodation removal, economic conditions are not “tight” just less “loose.” The economy may experience little to any inflation-jobs trade-off, as the economy continues to grow.

What will matter for the jobs-inflation trade-off is where rates go after the Fed reaches a point of neutral policy, and that point is quite far down the road and way too early to tell. 




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 Fed may once have followed the Taylor Rule, with the last being during the 2008 recession. 




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. Of note, the Taylor Rule today, and for some time in the past, has been suggesting the Fed needs to start removing accommodation, which is what the Fed is now doing.

Watch the video discussion above, and watch more Economist Perspective videos here.


CME Group Disclaimer

OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (, and is a member of the Securities Investor Protection Corporation ( BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) ( CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).


Trading and investment carry a high level of risk, and CQG, Inc. does not make any recommendations for buying or selling any financial instruments. We offer educational information on ways to use our sophisticated CQG trading tools, but it is up to our customers and other readers to make their own trading and investment decisions or to consult with a registered investment advisor. The opinions expressed here are solely those of the author and do not reflect the opinions of CQG, Inc. or its affiliates.