Monetary Policy Report: Using Rules for Benchmarking, March 2015

We then use 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. This report updates the special report issued in December 2014.

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 since the last report, the labor market has continued its exceptional performance, with 295,000 net new jobs added in February. Job growth was broad based, and the economy has added more than 1 million net new jobs during the past four months, a pace that matches some of the fastest job growth on record. The strong job growth has resulted in further declines in various measures of unemployment. The most cited measure, referred to as U3, has fallen to 5.5 percent, a decline of 1.2 percentage points over the past 12 months. Other measures such as U6, which includes marginally attached workers and those who report that they are working part time for economic reasons, also declined, but that measure remains elevated at 11 percent. Labor force participation has remained relatively stable at roughly 62.8 percent and, given demographic forces, it is unlikely to rebound sharply. Thus, continued job growth at anywhere near its present pace will further lower the unemployment rate over the remainder of the year. Moreover, data from the Job Openings and Labor Turnover Survey indicate a dynamic labor market with a high level of job openings 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 of the Federal Reserve System.