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.
Economic growth accelerated in the third quarter to 3.2 percent, and with unexpected strength in the most recent Quarterly Services Survey, that pace is likely to be revised upward. Job growth remains robust, and there has been some increased momentum in wage growth. Buoyed by solid income growth, consumption growth has remained a key driver of current economic activity. Housing is expected to contribute modestly to future growth, though investment in nonresidential structures remains weak and shows little sign of any near-term improvement. The same appears true for manufacturing and business fixed investment. Nowcasts indicate some deceleration in overall economic growth this quarter, with net exports becoming a significant drag. Manufacturing activity remains relatively flat, although several recent manufacturing surveys point to some possible improvement. Inflation continues to move ever so slowly toward the 2.0 percent target set by the Federal Open Market Committee (FOMC). Post election, the stock market has risen markedly, the dollar has appreciated against most major currencies, and oil prices have risen above $50 per barrel.
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. We thank Brie Coellner for her assistance.