Taylor's Rule

Taylor’s rule: stressin’ and obsessin’ about somebody else is no fun. Wait, that’s Taylor Swift’s rule. So, um, just let the haters keep on hatin'.

Stanford University economist John Taylor’s rule, which is the high-SAT-score “Taylor’s rule,” tells the Federal Reserve what to do with interest rates depending on how the economy is performing. When inflation is high and/or we’re at or above full employment, the Fed should raise interest rates. When the opposite is true, the Fed should lower interest rates.

There’s actually a formula for it, and it goes like this:

Taylor’s ideal rate = CIR + 0.5 (GDPe – GDPt) + 0.5 (Ie – It)

In this formula, CIR is our current interest rate, GDPe is the expected growth rate of our GDP, or gross domestic product, GDPt is our long-term growth rate, Ie is our expected inflation rate, and It is a scary clown...and, uh...also our long-term inflation rate. Pretty handy, right? Just plug in some numbers, and boom—we’ve got ourselves an interest rate.

Or do we? Some critics of Taylor’s rule (which is also called just plain “Taylor rule,” FYI) say it’s not all that helpful when the economy experiences a big shake-up, like the 2008 subprime mortgage crisis. But the critics of those critics say that if the Federal Reserve had observed Taylor’s rule before 2007-08, that crisis might’ve been a lot less of a crisis.