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

After a lackluster first quarter in which GDP grew a mere 1.2 percent, the economy appears to be headed for a significant bounce back. Numerous nowcasts put second quarter growth approaching 3.0 percent. Some of that resurgence is due to residual seasonality problems in the measurement of GDP that generally have been making first quarter growth appear weaker and second quarter growth appear stronger than may actually be the case. However, many other economic indicators also appear somewhat stronger, although some of the most recent data indicate a slowing in momentum.

[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.