The debate over the merits of rules vs. discretion is almost as old as central banking
As the British essayist and journalist Walter Bagehot noted in his 1873 classic “Lombard Street: A Description of the Money Market.”
“The practical difficulties of life cannot be met by very simple rules; those dangers being complex and many, the rules for encountering them cannot well be single or simple,”
In 1993, the economist John Taylor sought to explain recent Fed policy under chairmen Paul Volcker and Alan Greenspan with a rule.
It sets interest rates at “neutral”—a level that keeps inflation and unemployment stable over time—then adjusts them based on how far inflation is from the Fed’s target, now 2%, and how much slack the economy has
Mr. Powell has delivered three consecutive 0.75 percentage point increases, bringing its benchmark federal-funds rate to just over 3%
(RE: Not very high)
For now, they want the public to think they are so committed to 2% inflation that they will risk tightening too much and cause a recession. If the public expects inflation to fall, it is more likely that actual inflation will, too.
At some point, the Fed will appear to change its rule again, and economic weakness, unemployment and the neutral rate will again matter for interest-rate decisions. The challenge for markets is figuring out when.
Greg Ip WSJ 5 October 2022
https://www.wsj.com/articles/feds-rate-increases-defy-all-the-rules-11664977926
Who’s Afraid of Rules-Based Monetary Policy?
John B. Taylor Project Syndicate 16 October 2020
https://englundmacro.blogspot.com/2020/10/whos-afraid-of-rules-based-monetary.html
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