Assessing monetary accommodation: a simple empirical model of monetary policy and its implications for unemployment and inflation

This note suggests that household wealth growth and a long-forward interest rate can be used to construct a simple and convenient reference standard for assessing the current stance of monetary policy. It shows that the difference between the federal funds rate and this reference interest rate is a powerful predictor of the unemployment rate and inflation, producing real-time forecasts that are competitive with consensus-based forecasts from surveys of forecasting professionals. Moreover, one can understand past FOMC policy actions as efforts to adjust the stance of policy, so measured, in response to unemployment and inflation gaps. There is little evidence of inertia in this version of the Taylor rule, in contrast to Taylor-rule specifications that assume a fixed reference real federal funds rate.