How Central Banks Use the Taylor Rule: A Real-World Case

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jun 25, 2026 · 12m · transcript

In this episode of Monetary Policy Explained, Lucas and Luna break down the Taylor Rule: the simple equation central bankers use to set interest rates based on inflation and the output gap. Using a concrete example from the Fed's mid-2026 decision-making, they show how the rule's guidance at a 2.1 percent core PCE inflation rate and a 0.8 percent output gap would point to a fed funds rate of roughly 4.3 percent — well above the actual rate of 3.75 percent, highlighting the gap between theory and practice. They discuss critiques from dovish and hawkish camps, how the rule's…