FIGURE 15-1: The Federal Funds Rate: Actual and Suggested This figure shows the federal funds rate set by the Federal Reserve and the target rate that the Taylor rule for monetary policy would recommend. Notice that the two series move closely together.

Sources: Federal Reserve Board, U.S. Department of Commerce, U.S. Department of Labor, and author’s calculations. To implement the Taylor rule, the inflation rate is measured as the percentage change in the GDP deflator over the previous four quarters, and the GDP gap is measured as negative 2 times the deviation of the unemployment rate from its natural rate (as shown in Figure 7-1).