Monetary Policy Report: Using Rules for Benchmarking, June 2020

Introduction

Normally, this special report highlights ongoing work to benchmark the stance of monetary policy using a range of policy rules that are widely employed in studies of monetary economics.¹ We perform this 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. However, for this forecasting round we are not presenting results from our econometric model. Instead, we discuss the latest forecasts from the Survey of Professional Forecasters (SPF) and the most recent Summary of Economic Projections (SEP) from the Federal Open Market Committee (FOMC).

^[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.