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 Overview

The U.S. economy continues to grow above trend, with third quarter GDP growing at a healthy 3.2 percent and numerous nowcasts indicating that growth will remain above trend in the fourth quarter. The continued economic strength is due to solid consumption buttressed by a strong labor market and favorable financial conditions. Additionally, the expansion is broadening, with strong growth in manufacturing and business fixed investment.

[1]The views expressed in this report 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.