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 fourth quarter of 2018 grew at an above-trend 2.6 percent after growing at a strong 3.4 percent in the previous quarter. For the year as a whole, the economy expanded at a healthy 3.1 percent rate. The current quarter, however, is showing substantial signs of weakness, with most projections in the 1–2 percent range. Recent data on consumption have been surprisingly weak, especially given that the underlying fundamentals supporting consumption growth are sound. In December, consumption growth declined by 0.6 percent after showing solid strength over much of last year. Additionally, although January core retail sales recovered a portion of December’s large decline, overall the data are pointing to near-term weakness. Most analysts view the drop-off as temporary, as personal income growth has been averaging a healthy 4.6 percent annualized over the three months to January, the labor market has for the most part remained robust, wage growth is accelerating, stock prices are rising quite rapidly, and consumer confidence remains at a high level. Much of the March rebound in confidence was attributable to increased confidence among lower-income households earning less than $75,000 per year. Additionally, many observers were puzzled by the recent weakness in retail sales, as many retailers reported healthy profits in December, and contacts in the credit card industry saw no comparable declines in usage during that month.

[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 and Jordan Manes for their assistance.