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 some heightened risks that could impede the economy going forward 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

The labor market’s performance moderated in September, with 142,000 net jobs added, and July and August’s gains were revised downward by a total of 59,000. Employment gains now average about 167,000 a month for the third quarter and about 199,000 over the past six months, which is below the six-month average of 275,000 that had prevailed in February. September’s weaker totals were broad based across industries. A broader measure of labor market slack, U6 — which includes marginally attached workers and those who report that they are working part time for economic reasons — fell to a still-elevated 10.0 percent in September. Also, wage growth remains modest. Nevertheless, job growth has been brisk enough to bring the unemployment rate down to 5.1 percent, where it remained in September. Thus, unemployment is below most estimates of the natural rate of unemployment. Additionally, the number of job openings soared in the latest report, to 5.75 million in July, achieving yet another record high, and the layoff rate returned to its record low of 1.1 percent. Overall, the labor market should continue to underpin moderate growth in consumer spending.

[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.