Board of Governors of the Federal Reserve System

The Federal Open Market Committee (FOMC) continued reserve management purchases (RMPs) to maintain an ample supply of reserves. Since early January 2026, the Federal Reserve's System Open Market Account (SOMA) portfolio has purchased nearly $250 billion in Treasury bills of which approximately $160 billion are RMPs and $90 billion are reinvestments from principal payments of agency mortgage-backed securities, consistent with the Committee's intention to hold primarily Treasury securities in the SOMA. As a result, Federal Reserve assets have increased about $150 billion, bringing the total size of the balance sheet to $6.7 trillion (table A and figure A). Reserves, the largest liability item on the Federal Reserve's balance sheet, have grown $54 billion to a level of about $3.1 trillion (figure B). Usage of the overnight reverse repurchase agreement (ON RRP) facility remained near zero on most days, and standing repurchase agreement operations were tapped when economically sensible.

Table A. Balance sheet comparison

Figure A. Federal Reserve assets

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Note: The data extend through July 1, 2026. MBS is mortgage-backed securities. The key identifies shaded areas in order from top to bottom.

Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."

Figure B. Federal Reserve liabilities

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Note: The data extend through July 1, 2026. "Capital and other liabilities" includes the liability for earnings remittances due to the U.S. Treasury and contributions from the U.S. Treasury; the sum is negative from June 2023 onward because of the deferred asset that the Federal Reserve reports. The key identifies shaded areas in order from top to bottom.

Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."

Overnight money markets were stable, with conditions softening somewhat since the beginning of the year and RMPs effectively accommodating seasonal fluctuations in nonreserve liabilities, such as April and June tax inflows. The Federal Reserve's administered rates—the interest rate paid on reserve balances and the ON RRP offering rate—remained highly effective at maintaining the effective federal funds rate within the target range.

Since early January, the consolidated deferred asset of the Federal Reserve System has decreased $7 billion to a level of around $236 billion. Net income and remittances to the U.S. Treasury are calculated at the Federal Reserve Bank level. As a result, the Systemwide deferred asset is an aggregation of each Reserve Bank whose net income is yet to extinguish its respective accumulated deferred asset. By contrast, Reserve Banks that no longer have a deferred asset have collectively remitted around $6 billion to the U.S. Treasury this year. Negative net income and the associated deferred asset do not affect the Federal Reserve's conduct of monetary policy.

Simple interest rate rules relate a policy interest rate, such as the federal funds rate, to a small number of other economic variables—typically including measures of the current deviation of inflation from its target value and of resource slack in the economy. This discussion provides an update to the prescriptions of several simple policy rules that policymakers regularly consult as part of their monetary policy deliberations and that have been considered in past Monetary Policy Reports. The simple policy rules covered here called for levels of the policy rate in the first quarter of this year that were a little above the current target range for the federal funds rate of 3-1/2 to 3-3/4 percent, reflecting the fact that the measure of inflation used to calculate the prescriptions of these rules has moved up. However, the prescriptions shown here ignore that the economy would have evolved differently if the policy rate had followed one of the paths prescribed by the rules, and, hence, these prescriptions should be interpreted with care.

In many economic models, desirable economic outcomes can be achieved over time if monetary policy responds to changes in economic conditions in a manner that is predictable and adheres to some key design principles—including the notion that the policy rate should be adjusted sufficiently to ensure a return of inflation to the central bank's longer-run price-stability objective and to anchor longer-term inflation expectations at levels consistent with that objective. Simple policy rules do, however, also have important limitations. For example, they mechanically respond to only a small set of economic variables and thus necessarily involve abstracting from many of the factors that the Federal Open Market Committee (FOMC) considers when it assesses the appropriate setting of the policy rate. Relatedly, although simple policy rules typically respond to particular measures of inflation and resource slack, other measures could be used to calculate the rule prescriptions. Most simple policy rules also require measures of unobservable variables, like the neutral real interest rate and unemployment rate in the longer run, which can only be estimated with considerable uncertainty. In light of these and other limitations, achieving the potential benefits associated with using policy rules as part of a policy strategy requires efforts to promote the public's understanding of monetary policy strategy and the incorporation of timely data to measure the factors entering policy rules and the broader strategy. The recently announced task forces will be considering matters related to this point.

Selected Policy Rules: Descriptions

Table A shows the well-known Taylor (1993) rule, the "adjusted Taylor (1993)" rule, the "balanced approach" rule, and the "first difference" rule.¹ All rules considered here feature the difference between the annual change in the core personal consumption expenditures (PCE) price index and the FOMC's longer-run objective of 2 percent.² With the exception of the first-difference rule, all rules use the unemployment rate gap—measured as the difference between an estimate of the rate of unemployment in the longer run ($$ u_t^{LR}$$) and the current unemployment rate—and an estimate of the neutral real interest rate in the longer run ($$ r_t^{LR}$$).³ The first-difference rule uses the change in the unemployment rate over the past four quarters, rather than the unemployment rate gap, and the value of the policy rate in the preceding quarter, rather than the neutral interest rate in the long run.⁴

Table A. Monetary policy rules

Taylor (1993) rule	$$ R_t^{T93} = r_t^{LR} + \pi_t + 0.5 (\pi_t - \pi^{LR}) + (u_t^{LR} – u_t) $$
Adjusted Taylor (1993) rule	$$ R_t^{T93adj} = max \{ R_t^{T93} – Z_t , ELB \} $$
Balanced-approach rule	$$ R_t^{BA} = r_t^{LR} + \pi_t + 0.5(\pi_t - \pi^{LR}) + 2(u_t^{LR} – u_t) $$
First-difference rule	$$ R_t^{FD} = R_{t-1} + 0.5(\pi_t - \pi^{LR}) – (u_t – u_{t-4}) $$

Note: $$ R_t^{T93}$$, $$ R_t^{T93adj}$$, $$ R_t^{BA}$$, and $$ R_t^{FD}$$ represent the values of the nominal federal funds rate prescribed by the Taylor (1993), adjusted Taylor (1993), balanced-approach, and first-difference rule, respectively.

$$ R_{t-1}$$ denotes the average midpoint of the target range for the federal funds rate in quarter $$ t−1$$, $$ u_t$$ is the average unemployment rate in quarter $$ t$$, and $$ \pi_t$$ denotes the 4-quarter core personal consumption expenditures price inflation for quarter $$ t$$. In addition, $$ u_t^{LR}$$ is the rate of unemployment expected in the longer run, and $$ r_t^{LR}$$ is the level of the neutral real federal funds rate in the longer run that is expected to be consistent with sustaining maximum employment and keeping inflation at the Federal Open Market Committee’s 2 percent longer-run objective, represented by $$ \pi^{LR}$$. $$ Z_t$$ is the cumulative sum of past deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below an effective lower bound (ELB) of 12.5 basis points. Box note 1 provides references for the policy rules.

Unlike the other simple rules featured here, the adjusted Taylor (1993) rule recognizes that the federal funds rate cannot be reduced materially below the effective lower bound (ELB). By contrast, the standard Taylor (1993) rule prescribed policy rates that, during the pandemic-induced recession, were far below zero. To make up for the cumulative shortfall in policy accommodation following a period during which the federal funds rate is constrained by its ELB, the adjusted Taylor (1993) rule prescribed delaying the return of the policy rate to the (positive) levels prescribed by the standard Taylor (1993) rule.

Selected Policy Rules: Prescriptions

Figure A shows historical prescriptions for the federal funds rate under the four simple rules alongside the actual target federal funds rate. For each quarterly period, the figure reports the policy rates prescribed by the rules, taking as given the prevailing economic conditions and, where applicable, survey-based estimates of $$ u_t^{LR}$$ and $$ r_t^{LR}$$ at the time. All of the rules considered called for highly accommodative monetary policy in response to the pandemic-driven recession, followed by tighter policy as inflation picked up and labor market conditions strengthened. Starting around 2023, the prescribed values associated with most of the rules declined, as inflation eased and the unemployment rate increased. Subsequently, because the annual change in the core PCE price index has been somewhat above 2 percent, the prescriptions of the simple policy rules have also remained somewhat elevated relative to their pre-2020 levels.

Figure A. Historical federal funds rate prescriptions from simple policy rules

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Note: The rules use historical values of core personal consumption expenditures (PCE) inflation, the unemployment rate, and, where applicable, the midpoint of the target range for the federal funds rate constructed as the average of the lower and upper limits of the target range. Quarterly projections of longer-run values for the federal funds rate, the unemployment rate, and inflation used in the computation of the rules' prescriptions are interpolations to quarterly values of projections from the Survey of Market Expectations. The rules' prescriptions are quarterly, and the federal funds rate data are the monthly average of the daily midpoint of the target range for the federal funds rate and extend through June 2026.

Source: For core PCE inflation, PCEPILFE; for the unemployment rate, UNRATE; for the lower and upper limits of the federal funds target range, DFEDTARL and DFEDTARU, respectively; all from Federal Reserve Bank of St. Louis, Federal Reserve Economic Data; Federal Reserve Bank of New York, Survey of Market Expectations; Federal Reserve Board staff estimates.

1. The Taylor (1993) rule was introduced in John B. Taylor (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy, vol. 39 (December), pp. 195–214. The adjusted Taylor (1993) rule was studied in David Reifschneider and John C. Williams (2000), "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, vol. 32 (November), pp. 936–66. The balanced-approach rule was analyzed in John B. Taylor (1999), "A Historical Analysis of Monetary Policy Rules," in John B. Taylor, ed., Monetary Policy Rules (Chicago: University of Chicago Press), pp. 319–41. The first-difference rule is based on a rule suggested by Athanasios Orphanides (2003), "Historical Monetary Policy Analysis and the Taylor Rule," Journal of Monetary Economics, vol. 50 (July), pp. 983–1022. A review of policy rules is provided in John B. Taylor and John C. Williams (2011), "Simple and Robust Rules for Monetary Policy," in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3B (Amsterdam: North-Holland), pp. 829–59. The same volume of the Handbook of Monetary Economics also discusses approaches to deriving policy rate prescriptions other than through the use of simple rules. Return to text

2. In its Statement on Longer-Run Goals and Monetary Policy Strategy, the Committee reaffirmed its judgment that inflation at the rate of 2 percent, as measured by the annual change in the PCE price index, is most consistent over the longer run with the Federal Reserve's statutory maximum-employment and price-stability mandates. All the rules respond to the change in core PCE prices, rather than headline PCE prices, because current and near-term core inflation rates tend to outperform headline inflation rates as predictors of the medium-term behavior of headline inflation. Return to text

3. Implementations of simple rules often use the output gap as a measure of resource slack in the economy. In the rules described in table A, the output gap has been replaced with the unemployment rate gap (using a relationship known as Okun's law) because that gap better captures the FOMC's statutory goal to promote maximum employment. Movements in these alternative measures of resource utilization tend to be highly correlated. The neutral real interest rate in the longer run ($$ r_t^{LR}$$) is the level of the real federal funds rate that is expected to be consistent, in the longer run, with maximum employment and stable inflation. Like $$ u_t^{LR}$$, $$ r_t^{LR}$$ is determined largely by nonmonetary factors. Return to text

4. The first-difference rule shown in table A does not require estimates of $$ r_t^{LR}$$ or $$ u_t^{LR}$$, a feature that is touted by proponents of such rules as providing an element of robustness. However, this rule has its own shortcomings. For example, research suggests that this sort of rule often results in greater volatility in employment and inflation than what would be obtained under the Taylor (1993) and balanced-approach rules. Return to text

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