The Taylor Rule describes how the federal funds rate should be adjusted in response to movements in output relative to its long-run sustainable level and to movements in inflation relative to its target. The Taylor Rule thus explicitly embodies the dual objectives of monetary policy and is a form of flexible inflation targeting.
In practice, no one expects monetary policy to be conducted according to a rigid rule. Such rules can, however, be useful in informing policy decisions and helping policymakers calibrate their responses to changes in utilization and inflation rates. Moreover, research on how such rules affect the quality of macroeconomic performance can aid policymakers in arriving at their decisions.