We perform the exercise with a structural forecasting model based on the New Keynesian dynamic stochastic general equilibrium methodology.

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 of 2019 grew at a trend-like pace of 2.1 percent after growing by 2.0 percent in the previous quarter. However, consumption growth at 2.9 percent retracted a bit after a strong second-quarter increase of 4.6 percent. Recent data on retail sales have indicated a slowing in consumption growth, but light-vehicle sales are continuing to grow at a healthy pace. All-in-all the most recent data imply that growth in the fourth quarter may moderate further, but the greater-than-expected job growth and moderate growth in wages should support above-trend strength in consumption. Income is growing moderately, the stock market, although volatile, is at historic highs, and consumers remain optimistic. However, outside of a recent uptick in residential investment, no other factors appear likely to contribute to economic growth.

[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 Gillian Courtney and Catherine O’Donnell for their assistance.