when taylor introduced the taylor rule formula he noted it accurately reflected federal reserve policy during several years leading up to 1993 but also described it as a concept in a policy environment where it is practically impossible to follow mechanically any particular algebraic formula that describes the policy rule 2
the rule prescribes a higher federal funds rate when inflation is above the fed s inflation target and a lower one if inflation is lagging similarly real gdp growth above a target typically defined by the economy s full potential would dictate a higher interest rate while growth short of the mark would serve to lower it the taylor rule formulataylor s equation in its simplest form looks like r p 0 5y 0 5 p 2 2