Nevertheless, the traditional specification of the Taylor Rule does not provide a justification for tightening in March, relative to the earlier decisions to hold policy unchanged. According to the Taylor Rule, the federal funds rate should adjust over time to changes in utilization rates (the gap between actual and potential output or between the unemployment rate and NAIRU) and to changes in inflation.
Because utilization rates had not increased (at least had not increased outside the range of the last year) and core inflation was actually lower in March compared with earlier, the Taylor Rule did not dictate a tightening. The Rule did suggest, however, that monetary policy would have had to tighten over time if the forecast of rising utilization rates and higher inflation proved correct.