These considerations illustrate that there is now no obvious “right” setting for R* because we do not know how rapidly the forces restraining the economy will abate, and there is a significant risk that it could be very slow. When the economy has been hit with unusually persistent shocks, the Taylor rule, for this reason, provides a problematic benchmark.
Simple policy rules also typically neglect information with potentially important implications for the economic outlook because they focus only on where conditions are today. For example, simple rules ignore such important factors as fiscal policy, trends affecting global growth, structural developments influencing the supply of credit, and overall financial conditions. One special factor at the moment pertains to the Federal Reserve’s balance sheet.