How Central Banks Use the Taylor Rule

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jul 10, 2026 · 7m · transcript

In this episode of Monetary Policy Explained with Fexingo, Lucas and Luna take a deep dive into the Taylor Rule—the simple formula central bankers use to set interest rates based on inflation and output gaps. Using the current mid-2026 environment as a backdrop, they explain how the rule works, why it's been controversial since the 2007-2009 financial crisis, and how the Federal Reserve has adapted it over time. They walk through a concrete example: if inflation is 3% and the output gap is -1%, what should the policy rate be? They also discuss the limitations of the rule, from the zero…