John Taylor's formula for the Fed

The Indicator from Planet Money

NPR

Business

4.7 • 9.2K Ratings

🗓️ 3 November 2022

⏱️ 10 minutes

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Summary

Today the Fed raised interest rates to just under 4%. The Taylor Rule says this should have happened a year ago. We talk to John Taylor about letting a formula do the work instead.

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Transcript

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0:00.0	NPR.
0:12.0	Today the 12 members of what's known as the Federal Open Market Committee, or the FOMC,
0:17.9	made a big decision.
0:19.9	Good afternoon.
0:20.9	My colleagues and I are strongly committed.
0:22.8	The Chair Jerome Powell announced the FOMC had decided to raise interest rates, three
0:28.2	quarters of a percentage point today.
0:31.1	And interest rates can be suffocating for a lot of people.
0:35.4	Mortgage are more expensive, car loans and credit cards get harder to pay off.
0:40.4	Businesses stop hiring.
0:41.4	The overall effect is designed to slow down the economy to tackle inflation.
0:46.8	And instead of debating whether the 12 members of the FOMC are making the right or the wrong
0:51.3	decisions, there's another way we could be reimagining the Fed's work altogether.
0:56.8	We could be putting interest rates on autopilot, with a basic formula that a high school
1:02.6	could memorize.
1:04.0	The guide is pretty simple.
1:06.1	When they followed it, it's worked pretty well.
1:08.0	When they haven't followed it, it's not worked so well.
1:10.9	Stanford economist John Taylor is talking about his creation, the Taylor Rule.
1:16.7	This is the indicator from Planet Money, I'm Darien Woods.
1:19.6	And I'm Mary Childs.
1:20.9	The Taylor Rule is a disarmingly simple equation that could tell central banks how much to
	...

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