A number of variations can be formed of the Taylor rule, all of which are simplifications. Monetary policy decisions cannot, however, be taken solely on the basis of simple rules.
The US economy has recovered from the financial crisis. Beginning in October, the Fed will reduce the holdings of securities on its balance sheet that it had purchased in its securities purchase programmes.
The global economy is experiencing brisk, broadly based growth in the current year. World trade is undergoing a growth spurt. At the same time, inflation remains sluggish.
The euro area economy is growing, supported by monetary policy. Confidence in the economy is strong, and investment and employment are both growing. On the other hand, there still remain problems from the financial and debt crises, and the pace of structural reform has slowed.
The amount of underutilized domestic capacity is expected to gradually be taken up, and the global economy's generally favourable outlook will support growth in the euro area. Together these factors support expectations that the inflation rate will slowly return to the policy objective.
By promising low interest rates in the future, a central bank can provide stimulus for the economy today. The effectiveness of this kind of forward guidance can be assessed by the impact it has on market expectations regarding interest rates.
