Question

Go to https://www.federalreserve.gov/monetarypolicy/ files/FOMC_LongerRunGoals.pdf. Review the FOMC’s document, “Longer-Run Goals and Monetary Policy Strategy.” Explain why these goals are consistent with the Taylor principle.

Short answer

Fed achieves its objectives and maintains price stability through implementing an effective monetary policy and adhering to the Taylor principle.

Step-by-step solution

Step : 1 Mean of FOMC

The Federal Open Market Committee (FOMC) holds meetings in which it reviews monetary and economic conditions to assess the risk to long terms goals for stability and growth and to determine the correct policy stance.

Step : 2 Taylor's principle 

When inflation exceeds the target percentage or GDP exceeds its potential, interest rates should be raised, according to Taylor's principle. If the Fed does not follow this guideline and the inflation rate exceeds the interest rate, hyperinflation and price instability may result.

In the document, the FOMC has mentioned that it aims to keep the inflation rate at 2% and keep the long-term interest rates moderate. This is consistent with the Taylor principle as the principle states that the nominal interest rate should be increased more than the inflation rate so that the real interest rate increases.