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

Economic activity in the third quarter grew 3.4 percent after growing at a healthy 4.2 percent in the previous quarter. According to many nowcasts, growth has tapered back toward trend, implying that growth over all of 2018 will likely be around 3.0 percent. The deceleration is largely due to weakening in investment spending, both business fixed and residential. Consumption growth, however, remains solid, and the labor market remains robust. There are, however, a number of risks on the horizon, most notably surrounding policies involving foreign trade. Recently, asset prices have declined worldwide, foreign economic growth has weakened, and the effects of fiscal policy are likely waning.

[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 and Jordan Manes for their assistance.