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

Over the past few months, the labor market has continued its strong performance, with 280,000 net new jobs added in May. Job growth has been broad based, and the economy has added more than 500,000 net new jobs during the past two months, returning close to its pace in 2014, when job growth was extremely robust by historical standards. Because the labor force participation rate has also risen to 62.9 percent in May from 62.7 in March, the strong job growth has not resulted in further declines in various measures of unemployment. The most cited measure, referred to as U3, has remained at 5.5 percent, which is quite close to its natural rate, while U6, which includes marginally attached workers and those who report that they are working part time for economic reasons, has remained elevated at 10.8 percent. Because there is little expectation that the labor force participation rate will increase much further, continued job growth near its present pace will lower the unemployment rate further over the remainder of the year. Moreover, data from the Job Openings and Labor Turnover Survey indicate a dynamic labor market, with the highest level of job openings since the series’ inception in December 2000 and quit rates that are near their prerecession levels.

[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.