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Equation description:

In this equation, i sub t is the prescribed value of the policy interest rate in a given period t; pi sub t  minus  pi star sub t is the deviation of the actual inflation rate pi from its target pi star in period t; and y sub t minus y star sub t , the “output gap,” is the deviation of actual real output y from potential output y star in period t. The parameters a and b are positive numbers that describe how strongly the policy rate should respond to deviations of inflation from its target and of output from its potential.

As we would expect, the Taylor rule tells policymakers that interest rates should be higher when inflation is above target, (pi sub t minus pi star sub t) is greater than 0 , or when output is above its potential, (y sub t minus y star sub t) is greater than 0.

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Slide descriptions:

Slide 1: The Target Federal Funds Rate

Meeting Date Target Rate
February 1-2, 2000 5.75
March 21, 2000 6
May 16, 2000 6.5
June 27-28, 2000 6.5
August 22, 2000 6.5
October 3, 2000 6.5
November 15, 2000 6.5
December 19, 2000 6.5
January 30-31, 2001 5.5
March 20, 2001 5
May 15, 2001 4
June 26-27, 2001 3.75
August 21, 2001 3.5
October 2, 2001 2.5
November 6, 2001 2
December 11, 2001 1.75
January 29-30, 2002 1.75
March 19, 2002 1.75
May 7, 2002 1.75
June 25-26, 2002 1.75
August 13, 2002 1.75
September 24, 2002 1.75
November 6, 2002 1.25
December 10, 2002 1.25
January 28-29, 2003 1.25
March 18, 2003 1.25
May 6, 2003 1.25
June 24-25, 2003 1
August 12, 2003 1
September 15-16, 2003 1
October 28, 2003 1
December 9, 2003 1
January 27-28, 2004 1
March 16, 2004 1
May 4, 2004 1
June 29-30, 2004 1.25
August 10, 2004 1.5
September 21, 2004 1.75
November 10, 2004 2
December 14, 2004 2.25
February 1-2, 2005 2.5
March 22, 2005 2.75
May 3, 2005 3
June 29-30, 2005 3.25
August 9, 2005 3.5
September 20, 2005 3.75
November 1, 2005 4
December 13, 2005 4.25
January 30-31, 2006 4.5
March 27-28, 2006 4.75
May 10, 2006 5
June 28-29, 2006 5.25
August 8, 2006 5.25
September 20, 2006 5.25
October 24-25, 2006 5.25
December 12, 2006 5.25
January 30-31, 2007 5.25
March 20-21, 2007 5.25
May 9, 2007 5.25
June 27-28, 2007 5.25
August 7, 2007 5.25
September 18, 2007 4.75
October 30-31, 2007 4.5
December 11, 2007 4.25
January 29-30, 2008 3
March 18, 2008 2.25
April 29-30, 2008 2
June 24-25, 2008 2
August 5, 2008 2
September 16, 2008 2
October 28-29, 2008 1
December 15-16, 2008 0.125
January 27-28, 2009 0.125
March 17-18, 2009 0.125
April 28-29, 2009 0.125
June 23-24, 2009 0.125
August 11-12, 2009 0.125
September 22-23, 2009 0.125
November 3-4, 2009 0.125
December 15-16, 2009 0.125

Source: Federal Reserve Board

Slide 2. Evaluating the Tightness or Ease of Monetary Policy

General form of the Taylor rule:

isub t equals 2 plus pi sub t plus a(pi sub t  minus  pi star sub t) plus b(y sub t minus y star sub t)

where

  • isub t is the prescribed value of the policy interest rate in a given period t;
  • pi sub t  minus  pi star sub t is the deviation of the actual inflation rate pi from its target pi star in period t;
  • y sub t minus y star sub t , the "output gap," is the deviation of actual real output y from potential output y star in period t; and
  • a and b are positive numbers.

Slide 3: The Target Federal Funds Rate and the Taylor (1993) Rule Prescriptions

Meeting Date Target Rate Taylor Rule (output gap and headline CPI inflation as currently measured)
February 1-2, 2000 5.75 N/A
March 21, 2000 6 7.59
May 16, 2000 6.5 N/A
June 27-28, 2000 6.5 7.84
August 22, 2000 6.5 N/A
October 3, 2000 6.5 7.74
November 15, 2000 6.5 N/A
December 19, 2000 6.5 7.39
January 30-31, 2001 5.5 N/A
March 20, 2001 5 6.9
May 15, 2001 4 N/A
June 26-27, 2001 3.75 6.55
August 21, 2001 3.5 N/A
October 2, 2001 2.5 4.99
November 6, 2001 2 N/A
December 11, 2001 1.75 3.4
January 29-30, 2002 1.75 N/A
March 19, 2002 1.75 2.3
May 7, 2002 1.75 N/A
June 25-26, 2002 1.75 2.4
August 13, 2002 1.75 N/A
September 24, 2002 1.75 2.62
November 6, 2002 1.25 N/A
December 10, 2002 1.25 3.51
January 28-29, 2003 1.25 N/A
March 18, 2003 1.25 4.33
May 6, 2003 1.25 N/A
June 24-25, 2003 1 2.86
August 12, 2003 1 N/A
September 15-16, 2003 1 3.64
October 28, 2003 1 N/A
December 9, 2003 1 3.46
January 27-28, 2004 1 N/A
March 16, 2004 1 3.23
May 4, 2004 1 N/A
June 29-30, 2004 1.25 4.65
August 10, 2004 1.5 N/A
September 21, 2004 1.75 4.62
November 10, 2004 2 N/A
December 14, 2004 2.25 5.86
February 1-2, 2005 2.5 N/A
March 22, 2005 2.75 5.52
May 3, 2005 3 N/A
June 29-30, 2005 3.25 5.26
August 9, 2005 3.5 N/A
September 20, 2005 3.75 6.59
November 1, 2005 4 N/A
December 13, 2005 4.25 6.75
January 30-31, 2006 4.5 N/A
March 27-28, 2006 4.75 7.13
May 10, 2006 5 N/A
June 28-29, 2006 5.25 7.28
August 8, 2006 5.25 N/A
September 20, 2006 5.25 6.32
October 24-25, 2006 5.25 N/A
December 12, 2006 5.25 4.41
January 30-31, 2007 5.25 N/A
March 20-21, 2007 5.25 4.98
May 9, 2007 5.25 N/A
June 27-28, 2007 5.25 5.48
August 7, 2007 5.25 N/A
September 18, 2007 4.75 5.04
October 30-31, 2007 4.5 N/A
December 11, 2007 4.25 7.56
January 29-30, 2008 3 N/A
March 18, 2008 2.25 7.36
April 29-30, 2008 2 N/A
June 24-25, 2008 2 7.27
August 5, 2008 2 N/A
September 16, 2008 2 8.08
October 28-29, 2008 1 N/A
December 15-16, 2008 0.125 1.46
January 27-28, 2009 0.125 N/A
March 17-18, 2009 0.125 0
April 28-29, 2009 0.125 N/A
June 23-24, 2009 0.125 0
August 11-12, 2009 0.125 N/A
September 22-23, 2009 0.125 0
November 3-4, 2009 0.125 N/A
December 15-16, 2009 0.125 N/A

 N/A Not applicable Return to table

Source: Federal Reserve Board, Bureau of Labor Statistics, Bureau of Economic Analysis, and Federal Reserve staff calculations.

Slide 4: The Target Rate and the Taylor Rule Prescriptions Using Real-Time Inflation Forecasts

Meeting Date Target Rate Taylor Rule (output gap and headline CPI inflation as currently measured) Taylor Rule (output gap and forecast of PCE inflation as measured in real time)
February 1-2, 2000 5.75 N/A 5.22
March 21, 2000 6 7.59 6.01
May 16, 2000 6.5 N/A 5.89
June 27-28, 2000 6.5 7.84 5.83
August 22, 2000 6.5 N/A 5.03
October 3, 2000 6.5 7.74 5.33
November 15, 2000 6.5 N/A 5.07
December 19, 2000 6.5 7.39 4.80
January 30-31, 2001 5.5 N/A 3.85
March 20, 2001 5 6.9 4.08
May 15, 2001 4 N/A 3.63
June 26-27, 2001 3.75 6.55 3.41
August 21, 2001 3.5 N/A 3.08
October 2, 2001 2.5 4.99 2.69
November 6, 2001 2 N/A 2.65
December 11, 2001 1.75 3.4 2.13
January 29-30, 2002 1.75 N/A 2.17
March 19, 2002 1.75 2.3 3.55
May 7, 2002 1.75 N/A 3.75
June 25-26, 2002 1.75 2.4 3.92
August 13, 2002 1.75 N/A 3.08
September 24, 2002 1.75 2.62 3.53
November 6, 2002 1.25 N/A 2.95
December 10, 2002 1.25 3.51 3.13
January 28-29, 2003 1.25 N/A 2.47
March 18, 2003 1.25 4.33 2.63
May 6, 2003 1.25 N/A 1.58
June 24-25, 2003 1 2.86 1.68
August 12, 2003 1 N/A 1.72
September 15-16, 2003 1 3.64 1.88
October 28, 2003 1 N/A 1.81
December 9, 2003 1 3.46 2.15
January 27-28, 2004 1 N/A 2.00
March 16, 2004 1 3.23 2.61
May 4, 2004 1 N/A 2.27
June 29-30, 2004 1.25 4.65 3.22
August 10, 2004 1.5 N/A 2.74
September 21, 2004 1.75 4.62 2.66
November 10, 2004 2 N/A 2.71
December 14, 2004 2.25 5.86 2.87
February 1-2, 2005 2.5 N/A 3.21
March 22, 2005 2.75 5.52 N/A
May 3, 2005 3 N/A N/A
June 29-30, 2005 3.25 5.26 N/A
August 9, 2005 3.5 N/A 4.53
September 20, 2005 3.75 6.59 N/A
November 1, 2005 4 N/A N/A
December 13, 2005 4.25 6.75 N/A
January 30-31, 2006 4.5 N/A 4.68
March 27-28, 2006 4.75 7.13 N/A
May 10, 2006 5 N/A N/A
June 28-29, 2006 5.25 7.28 N/A
August 8, 2006 5.25 N/A 4.81
September 20, 2006 5.25 6.32 N/A
October 24-25, 2006 5.25 N/A N/A
December 12, 2006 5.25 4.41 N/A
January 30-31, 2007 5.25 N/A 4.52
March 20-21, 2007 5.25 4.98 N/A
May 9, 2007 5.25 N/A N/A
June 27-28, 2007 5.25 5.48 N/A
August 7, 2007 5.25 N/A 5.56
September 18, 2007 4.75 5.04 N/A
October 30-31, 2007 4.5 N/A N/A
December 11, 2007 4.25 7.56 N/A
January 29-30, 2008 3 N/A 4.36
March 18, 2008 2.25 7.36 N/A
April 29-30, 2008 2 N/A 5.43
June 24-25, 2008 2 7.27 N/A
August 5, 2008 2 N/A 5.31
September 16, 2008 2 8.08 N/A
October 28-29, 2008 1 N/A 0.46
December 15-16, 2008 0.125 1.46 N/A
January 27-28, 2009 0.125 N/A 0.00
March 17-18, 2009 0.125 0 N/A
April 28-29, 2009 0.125 N/A 0.00
June 23-24, 2009 0.125 0 N/A
August 11-12, 2009 0.125 N/A 0.12
September 22-23, 2009 0.125 0 N/A
November 3-4, 2009 0.125 N/A N/A
December 15-16, 2009 0.125 N/A N/A

Source: Federal Reserve Board, Bureau of Labor Statistics, Bureau of Economic Analysis, and Federal Reserve staff calculations.

Slide 5: Rate of Increase in House Prices 1978:Q1-2009:Q3

Quarter 4-quarter change (pct)
1978Q1 18.4
1978Q2 14.78
1978Q3 15.15
1978Q4 15.32
1979Q1 16
1979Q2 17.35
1979Q3 16.31
1979Q4 16.33
1980Q1* 13.21
1980Q2* 9.96
1980Q3* 10.37
1980Q4 8.72
1981Q1 8.51
1981Q2 8.07
1981Q3* 5.44
1981Q4* 5.57
1982Q1* 3.07
1982Q2* 2.54
1982Q3* 2.14
1982Q4* 1.18
1983Q1 3.09
1983Q2 3.96
1983Q3 5.17
1983Q4 5.72
1984Q1 5.54
1984Q2 5.36
1984Q3 5.19
1984Q4 4.35
1985Q1 4.67
1985Q2 4.77
1985Q3 4.8
1985Q4 6.29
1986Q1 7.3
1986Q2 7.91
1986Q3 8.68
1986Q4 8.19
1987Q1 9.31
1987Q2 10.16
1987Q3 10.16
1987Q4 10.2
1988Q1 8.03
1988Q2 7.58
1988Q3 8.16
1988Q4 8.54
1989Q1 9.56
1989Q2 8.23
1989Q3 6.03
1989Q4 5.49
1990Q1 3.97
1990Q2 3.08
1990Q3* 2.19
1990Q4* -0.13
1991Q1* -1.67
1991Q2 -0.69
1991Q3 -0.62
1991Q4 -0.36
1992Q1 0.4
1992Q2 -0.58
1992Q3 -0.68
1992Q4 0.18
1993Q1 0.45
1993Q2 0.81
1993Q3 2.01
1993Q4 2.57
1994Q1 2.76
1994Q2 2.76
1994Q3 2.27
1994Q4 1.72
1995Q1 1.39
1995Q2 1.48
1995Q3 2.13
1995Q4 2.18
1996Q1 2.84
1996Q2 3.09
1996Q3 2.54
1996Q4 2.5
1997Q1 2.56
1997Q2 2.62
1997Q3 3.37
1997Q4 4.42
1998Q1 5.56
1998Q2 6.09
1998Q3 6.62
1998Q4 6.96
1999Q1 6.52
1999Q2 7.09
1999Q3 7.21
1999Q4 7.49
2000Q1 8.49
2000Q2 9.16
2000Q3 9.57
2000Q4 9.81
2001Q1* 10.18
2001Q2* 9.42
2001Q3* 9.27
2001Q4* 9.07
2002Q1 8.35
2002Q2 8.98
2002Q3 9.79
2002Q4 10.53
2003Q1 10.52
2003Q2 9.98
2003Q3 10.05
2003Q4 9.99
2004Q1 12.61
2004Q2 15.13
2004Q3 15.54
2004Q4 16.63
2005Q1 17.81
2005Q2 16.9
2005Q3 16.8
2005Q4 15.53
2006Q1 11.57
2006Q2 7.39
2006Q3 3.62
2006Q4 1.75
2007Q1 -2.4
2007Q2 -3.79
2007Q3 -6.31
2007Q4* -9.98
2008Q1* -12.55
2008Q2* -15.02
2008Q3* -16.81
2008Q4* -19.69
2009Q1* -22.07
2009Q2* -15.72
2009Q3* -9.55

 Note: * refers to National Bureau of Economic Research (NBER) recessions. Return to table

Source: FirstAmerican LoanPerformance.

Slide 6: Conditional Forecasts for the Federal Funds Rate and House Prices

Quarter Federal Funds Rate + 2 standard deviations Federal Funds Rate - 2 standard deviations Federal Funds Rate Relative House Prices (index = 0 in 2000Q1) + 2 standard deviations Relative House Prices (index = 0 in 2000Q1) - 2 standard deviations Relative House Prices (index = 0 in 2000Q1)
2000Q1 5.68 5.68 5.68 0.00 0.00 0.00
2000Q2 6.27 6.27 6.27 2.28 2.28 2.28
2000Q3 6.52 6.52 6.52 3.98 3.98 3.98
2000Q4 6.47 6.47 6.47 5.67 5.67 5.67
2001Q1 5.60 5.60 5.60 7.41 7.41 7.41
2001Q2 4.33 4.33 4.33 9.20 9.20 9.20
2001Q3 3.50 3.50 3.50 10.86 10.86 10.86
2001Q4 2.13 2.13 2.13 12.31 12.31 12.31
2002Q1 1.73 1.73 1.73 13.86 13.86 13.86
2002Q2 1.75 1.75 1.75 15.33 15.33 15.33
2002Q3 1.74 1.74 1.74 17.57 17.57 17.57
2002Q4 1.44 1.44 1.44 19.87 19.87 19.87
2003Q1 3.09 0.28 1.25 22.25 20.16 21.75
2003Q2 2.57 -0.77 1.25 23.95 20.49 23.28
2003Q3 2.37 -1.29 1.02 25.38 20.97 25.19
2003Q4 2.91 -0.93 1.00 26.76 21.65 27.41
2004Q1 3.29 -0.66 1.00 27.80 22.15 30.57
2004Q2 4.17 0.15 1.01 28.97 22.88 34.06
2004Q3 4.87 0.82 1.43 30.15 23.69 37.06
2004Q4 5.23 1.15 1.95 31.26 24.46 40.08
2005Q1 5.05 0.95 2.47 32.49 25.41 44.11
2005Q2 5.34 1.24 2.94 33.77 26.43 47.63
2005Q3 6.17 2.06 3.46 35.20 27.63 50.40
2005Q4 6.05 1.94 3.98 36.66 28.87 52.59
2006Q1 6.49 2.37 4.46 38.02 30.03 53.99
2006Q2 7.24 3.12 4.91 39.48 31.30 53.86
2006Q3 6.64 2.52 5.25 41.03 32.67 52.95
2006Q4 6.74 2.62 5.25 42.59 34.02 52.99
2007Q1 6.47 2.34 5.26 44.06 35.29 50.45
2007Q2 6.12 1.99 5.25 45.60 36.60 48.28
2007Q3 5.60 1.46 5.07 46.78 37.54 45.44
2007Q4 5.18 1.02 4.50 47.59 38.10 41.24
2008Q1 4.43 0.24 3.18 48.00 38.23 35.29
2008Q2 4.25 0.02 2.09 47.84 37.80 30.14
2008Q3 4.51 0.21 1.94 47.50 37.21 25.63
2008Q4 3.16 -1.41 0.51 47.02 36.50 18.73

Source: Federal Reserve Board, Bureau of Economic Analysis, FirstAmerican LoanPerformance, and Federal Reserve staff calculations.

Slide 7. Alternative Mortgage Instruments and Associated Initial Monthly Payments

Mortgage Product Initial Monthly Payment Payment as a Percentage of FRM Payment
Fixed-rate mortgage (FRM) $1,079.19  100.0
Adjustable-rate mortgage (ARM) 903.50  83.7
Interest-only/ARM  663.00  61.4
40-year amortization (ARM)   799.98  74.1
Negative amortization ARM   150.00  13.9
Pay-option ARM   <150.00  <13.9

Note: Interest rates used in these calculations were 6.00 percent for FRMs and 4.42 percent for standard ARMs. For purposes of the calculations, we assume a house price of $225,000 and a 20 percent down payment, and that the borrower qualifies for a prime product.

Source: Interest rates for these calculations are from Freddie Mac and are for the period from 2003 through 2006.

Slide 8. Nontraditional Mortgage Features (Percent of ARM originations)

  Interest Only Extended Amortization Negative Amortization Alt-A Pay-Option Alt-A
Subprime Alt-A Subprime Alt-A
2000 0 0 - -
2001 0 8 0 0 - -
2002 2 37 0 0 - -
2003 5 48 0 0 19 11
2004 18 51 0 0 40 25
2005 21 48 13 0 46 38
2006 16 51 33 2 55 38

Source: Calculations based on data from First American LoanPerformance.

Slide 9: Monetary Policy and House Prices in the Advanced Economies

Country Average Taylor rule residuals (2002:Q1–2006:Q3) Change in real house prices (2001:Q4–2006:Q3)
Australia -0.75 36.87
Austria -1.45 -3.30
Belgium -1.73 52.27
Canada -2.19 40.66
Switzerland -1.61 7.96
Denmark -1.54 54.70
Germany -0.70 -13.47
Spain -3.51 72.23
Finland 0.01 36.13
France -1.46 60.80
United Kingdom -0.07 54.90
Greece -4.05 27.07
Ireland -3.49 68.72
Italy -1.95 31.98
Japan -0.40 -20.16
Norway -0.26 32.63
Netherlands -1.34 11.13
New Zealand -0.10 69.92
Sweden -0.36 41.85
United States -2.45 27.91

Source: International Monetary Fund.

Slide 10: Current Accounts and House Prices in the Advanced Economies

Country Change in Current Account as percent of GDP 2001Q4 to 2006Q3 Change in real house prices (2001:Q4–2006:Q3)
Australia -2.48 36.87
Austria 3.09 -3.30
Belgium -1.41 52.27
Canada 0.00 40.66
Switzerland 4.67 7.96
Denmark 1.72 54.70
Germany 5.09 -13.47
Spain -5.41 72.23
Finland -5.80 36.13
France -2.69 60.80
United Kingdom -1.45 54.90
Greece -4.25 27.07
Ireland -0.38 68.72
Italy -3.60 31.98
Japan 1.17 -20.16
Norway 2.22 32.63
Netherlands 7.75 11.13
New Zealand -3.51 69.92
Sweden 4.36 41.85
United States -2.92 27.91

International Monetary Fund, Haver Analytics, and Federal Reserve staff calculations.

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Last update: January 3, 2010