Fed should scrap the Taylor Rule as policy guide: Kocherlakota

PHILADELPHIA (MarketWatch) - The Federal Reserve should scrap the famous Taylor Rule once and for all as a key benchmark for interest-rate policy because using it in the wake of the financial crisis led the Fed to make policy choices that kept both job growth and prices "needlessly low for years," said Narayana Kocherlakota, the president of the Minneapolis Fed, on Friday. Specifically, Kocherlakota said the Fed used the rule as a guide in November 2009 just after the Great Recession, and, as a result, it led them "to forgo the timely creation of hundreds of thousands-perhaps millions-of jobs in order to get interest rates back up to normal more rapidly." That's because the Taylor Rule has a built-in penalty on interest rates outside historic norms. Kocherlakota, who is a leading Fed dove and retiring at the end of the year, urged the U.S. central bank to adopt a new strategy and respond quickly to expectations of poor job growth or weak inflation. This change would engender better economic outcomes, especially in response to severe adverse shocks, he said. House Republicans have been pressing the Fed to adopt the Taylor Rule as the single rule to follow but Fed Chairwoman Janet Yellen has resisted.

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