harris, jan hatzius, and kenneth d. west ( 2015 ), the equilibrium real funds rate : past, present and future, working paper for u. s. monetary policy forum, august. see thomas laubach and john c. williams “ measuring the natural rate of interest ”, review of economics and statistics, november 2003, vol 85, no. 4, pp 1063 – 1070. updated estimates available from the federal reserve bank of san francisco. bis central bankers ’ speeches affects economic activity through its impact on financial conditions – including the level of equity prices, bond yields, the foreign exchange value of the dollar and credit conditions. if the relationship between the federal funds rate and other indicators of financial conditions were stable, then one could just focus on the level of short - term rates. 5 but, because financial conditions vary considerably relative to short - term rates, as we have seen in the financial crisis and its aftermath, one needs to consider developments in financial conditions more broadly in setting monetary policy. in fact, at times, when short - term rates have been pinned at the zero lower bound, the federal reserve has taken actions that eased financial conditions without changing shortterm interest rates. such actions have included forward guidance that the fomc was likely to keep short - term rates low for a long time and large - scale asset purchases that led to lower bond term premia. now, as i said at the start, just because i don ’ t want to follow a rule mechanically does not mean that i favor the polar opposite – that is, a fully discretionary monetary policy in which market participants, households and businesses cannot anticipate how monetary policy is likely to evolve as economic and financial market conditions and the economic outlook change. if households and businesses do not have a good notion of how the federal reserve will respond to changing economic and financial market conditions, then this would loosen the linkage between short - term rates and financial conditions. this would also likely lead to greater uncertainty about the outlook and higher risk premia, and it would make it more difficult for policymakers to attain their objectives. instead, what i favor is a careful elucidation of those factors that influence the economic outlook and how monetary policy is likely to respond to changes in the outlook. this includes fiscal policy, productivity growth, the international outlook and financial conditions, as well as how much employment and inflation deviate from the fed ’ s objectives. by conducting policy in a transparent way and communicating what

at the start that the taylor rule ( by which i mean the formulation based on john ’ s 1993 and 1999 papers ) has a number of positive attributes that make it a useful reference for policymakers. first, it has two parameters – the long - term inflation objective and the level of potential output – that map directly to the federal reserve ’ s dual mandate objectives. second, the rule has the desirable feature that when economic shocks push the economy away from the central bank ’ s objectives, the taylor rule prescribes a policy response that can help push the economy back toward the central bank ’ s goals. third, a number of studies have shown that taylor rules are robust in the sense that they generally perform quite well across a range of different assumptions about how the economy is structured and operates. despite these attractive features, i don ’ t believe that any prescriptive rule, including the taylor rule, can take the place of a monetary policy framework that incorporates the fomc ’ s collective assessment of the large number of factors that impact the economic outlook. jonathan mccarthy, paolo pesenti, argia sbordone and joseph tracy assisted in preparing these remarks. bis central bankers ’ speeches as i see it, the taylor rule has several significant shortcomings that can be detrimental to the attainment of the federal reserve ’ s mandated objectives. these shortcomings are not just theoretical ; they have been very relevant to monetary policy in recent years. first, the taylor rule is not forward - looking. its policy prescription is based on the current size of the output gap and the deviation of current inflation from the fed ’ s objective, not on how these variables are likely to evolve in the future. so, in a rapidly changing environment, the taylor rule and other similar prescriptive rules will wind up being “ behind the curve. ” for example, in the fall of 2008, taylor rule prescriptions were well above the level of rates that was appropriate given the sharp and persistent deterioration in the economic outlook and the sharp tightening in financial conditions that occurred during that period. of course, many economists at that time recognized that such prescriptions would have been inappropriate and suggested various ad hoc modifications to the prescriptions – in fact, john himself suggested that modifications to his rule were appropriate at that time. 2 nonetheless, there was no consensus about the “ right ” modification to the rules at that time, in part, because the circumstances were unprecedented and the outlook so uncertain. if the fomc had been