what is the taylor rule 
the taylor rule sometimes referred to as taylor s rule or taylor principle is an equation linking the federal reserve s benchmark interest rate to levels of inflation and economic growth stanford economist john taylor originally proposed the rule as a rough guideline for monetary policy but has subsequently urged a fixed rule policy based on the equation a cause adopted by republicans seeking to limit the federal reserve s policy discretion the taylor rule s formula ties the fed s key interest rate policy instrument the federal funds rate to two factors the difference between the actual and targeted inflation rates and that between the desired and apparent growth in the real gross domestic product gdp because policymakers aim for maximum sustainable growth at the economy s productive potential the difference between the actual and desired real gdp growth rates can also be described as an output gap 1understanding the taylor rule