John Taylor is of course one of the world’s most influential academic commentators on monetary policy and, I might say, one whose judgements most (if not all) of us on the SOMC usually agree with to a very great extent. One of his most notable accomplishments is, of course, the development of the well-known “Taylor Rule” as a guideline for the conduct of monetary policy. Almost every one in this room is, I suspect, at least somewhat familiar with this proposed policy rule.
The economy is growing, labor markets have improved dramatically, and inflation is forecast to return to two percent over the intermediate term. However, the Fed still expresses extreme caution about normalizing monetary policy, citing myriad concerns, ranging from sluggish wage growth and low inflation to foreign economic and political risks, which might delay the date at which interest rates finally lift off their zero lower bound. This creates the potential for an erosion of the FOMC’s credibility and suggests the Fed lacks a clear strategy for getting monetary policy back on track.