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 first quarter appears to have moderated after growing 2.5 percent in the fourth quarter of 2017. Many forecasters project that fourth quarter growth will be revised upward to around 3 percent, but the expectation is for growth of slightly below 2 percent this quarter.

[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.