When John Taylor created the Taylor rule for monetary policy, he was able to evaluate the effectiveness of different practices by looking back at years of inflation-fighting around the world. The Taylor rule is frequently cited by economists for its accuracy in determining where the interest rate needs to be to fight inflation. Currently, the Taylor rule predicts that the federal funds rate should be around 7 percent, two percentage points higher than it currently is, to combat the current inflation rate of 5 percent. However, despite the gradual increase in interest rates over the past year, there has been little progress in reducing inflation.
As the Federal Open Market Committee meets this week, some officials have suggested pausing increases and watching the data, with futures markets predicting a 72 percent chance that rates will remain steady at the June 14 meeting. However, given the barely-budging inflation data, elevated wage inflation, and the strong economy, it is concerning that the Fed would take this position. In the 1970s, haphazard Fed discretionary policy led to inflation waves that eventually required brutally high interest rates to control. If the Fed wavers now, history may repeat itself, with higher inflation accelerating and harming workers and consumers. The rationale for a pause is to stop and look at the data, but the data in hand already suggests that more needs to be done.
