We then employ this model to explore the expected behavior of economic variables, including the policy rate, under alternative policy rules. The policy rules help to benchmark not only the current stance of the federal funds rate but also guidance on how the path of policy is likely to evolve in the context of the model. Such an exercise as part of a more comprehensive quarterly monetary policy report would enhance communication and promote a more systematic approach to monetary policy.

We begin with an overview of the economy and then discuss the benchmark model we use to generate our forecasts with different policy rules. The remainder of the report highlights the outcomes of different robust policy rules and discusses why policymakers might choose to deviate from the rules.

Economic Overview

We start with an overview of the U.S. economy and then turn to some of the heightened risks that could impact the economy going forward. After a lull in the early fall, employment growth has regained its robust momentum with 211,000 net new jobs added in November, following the addition of 298,000 net new jobs in October. The recent strength has brought the unemployment rate down to 5.0 percent, a rate that is consistent with most analysts’ views of the natural rate of unemployment. With the exception of mining and drilling, job gains were broad based. Additionally, the number of job openings remains elevated, and a broader measure of labor market slack, U6 — which includes marginally attached workers and those who report that they are working part time for economic reasons — continued to decline to 9.9 percent. Although still somewhat elevated relative to its prerecession level, U6 has declined by 1.4 percent since January. The strong job growth has yet to translate into strong wage growth, but there is increasing anecdotal evidence of wage pressures in select job categories. Thus, the overall labor market picture is fairly bright and should continue to underpin solid growth in consumer spending.

[1]The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

View the Full Report