When inflation spiked after COVID-19, many critics accused the Federal Reserve of abandoning traditional monetary policy. In a study presented at the 2025 Jackson Hole Economic Policy Symposium, UC Berkeley economists Emi Nakamura, Venance Riblier and J\u00f3n Steinsson revisited that claim.<\/p>\n
At the center of the debate is the Taylor Rule, a guideline developed in the 1990s to describe how central banks should adjust interest rates in response to inflation and economic conditions. According to the Berkeley researchers, the Fed deviated from this rule during the pandemic more than any other point in history.<\/p>\n
\u201cThe Taylor Rule has attained a kind of mythical status within monetary economics,\u201d said Steinsson. \u201cIn 2021 and 2022, when inflation was rising, there was a very prevalent view that monetary policy was doing something wrong because it was deviating strongly from the Taylor Rule.\u201d<\/p>\n
The Taylor Rule prescribes that the central bank raise interest rates faster than inflation is rising, according to the researchers. However, when inflation surged after COVID, the Fed initially kept rates low. Economists warned this would cause inflation to spiral out of control. However, while prices never returned to pre-pandemic levels, the actual inflation rate declined steadily through 2023 and 2024.\u00a0<\/p>\n
To account for this disinflation \u2014 a slowdown in the rate of inflation rather than a decline in overall prices \u2014 the researchers examined how well the Taylor Rule actually reflects how central banks behave in practice.\u00a0<\/p>\n
Using parameters chosen decades ago by economist John B. Taylor, they tested how well the rule performed over time. Taylor designed it as a guideline for adjusting interest rates in response to inflation. While it worked well when it was first introduced, it performed poorly in the early 1980s, when the Fed raised interest rates to curb inflation, and after the 2000s, when rates stayed unusually low.<\/p>\n
\u201cPeople use this rule to explain why interest rates behaved the way they did during certain periods, but it doesn\u2019t hold up well across other periods,\u201d explained Riblier. \u201cIt\u2019s not as reliable as people often think.\u201d<\/p>\n
The second part of the study compares various countries\u2019 post-COVID responses. The authors distinguish between \u201clate risers,\u201d such as the U.S. and other high-income countries, and \u201cearly risers,\u201d including emerging markets that raised rates quickly. Contrary to what the Taylor Rule would suggest, early risers often experienced higher and more persistent inflation.<\/p>\n
\u201cWhile the Fed deviated massively from what the Taylor Rule prescribed, so did many other countries around the world,\u201d said Nakamura. \u201cSurprisingly, countries that responded earlier and more aggressively to COVID inflation didn\u2019t perform better in terms of having lower subsequent inflation.\u201d<\/p>\n
The researchers argue that the key difference is credibility. Countries with long records of low and stable inflation were better able to keep public expectations anchored, even during a sharp price surge. That credibility allowed central banks like the Fed to wait out short-term inflation without serious consequences, they explained.\u00a0<\/p>\n
\u201cThe credibility of the Fed is important because it anchors inflationary expectations. Building up that credibility is difficult, but it doesn\u2019t mean you don\u2019t want to use it occasionally,\u201d said Nakamura. \u201cOur reading of what was going on was that the Fed was cashing in some of its credibility during post-COVID inflation.\u201d<\/p>\n
The study emphasizes that while rules like the Taylor Rule are useful, they\u2019re often an incomplete picture of monetary policy. It can make sense to deviate from them during periods of temporary inflation. The researchers also concluded that maintaining credibility is key. Only central banks with a strong track record can safely navigate temporary inflation shocks while keeping long-term inflation expectations under control.<\/p>\n","protected":false},"excerpt":{"rendered":"When inflation spiked after COVID-19, many critics accused the Federal Reserve of abandoning traditional monetary policy. In a…\n","protected":false},"author":2,"featured_media":271635,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34],"tags":[143,145,144],"class_list":{"0":"post-271634","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-oakland","8":"tag-oakland","9":"tag-oakland-headlines","10":"tag-oakland-news"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/271634","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/comments?post=271634"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/271634\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media\/271635"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media?parent=271634"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/categories?post=271634"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/tags?post=271634"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}