Federal Reserve

Economist John Taylor thinks the Fed is 'in a better place' with interest rates

VIDEO3:3103:31
Hoover Institution's John Taylor on the Fed and the US economy

Raising interest rates have given the Federal Reserve some breathing room for the next time a downturn hits, economist John Taylor said Friday.

The Stanford economist and developer of the Taylor rule model that determines where interest should be based on growth told CNBC that he sees a central bank that has returned to rules-based policy in recent years, which he considers a positive.

"I think they made some good changes since they started to normalize. I think that's a good thing," Taylor told CNBC's Steve Liesman during a "Squawk Box" interview. "To get a normalized Fed is good for the economy. I think that's good they're in a better place at this point in case something happens."

Taylor reportedly had been on President Donald Trump's short list for Fed appointments. However, his view on rates runs counter to the president's, who has called for a 1 percentage point reduction in the benchmark funds rate.

Using Taylor's formula theoretically would put the funds rate around 3.5%, according to an Atlanta Fed calculator, though he did not express a view on where he thinks the right level is now. The current funds rate is targeted in a range between 2.25% and 2.5%.

He also said he thinks the economy can break out of its long-standing trend growth of a "lousy" 2% and get up to 3%.