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

After a lackluster first quarter in which GDP grew a mere 1.2 percent, the economy rebounded in the second quarter, growing at a healthy 3.1 percent. Additionally, unadjusted for the effects of the recent hurricanes, numerous nowcasts show above-trend third quarter growth. The continued economic strength is due to solid consumption activity buttressed by a strong labor market and favorable financial conditions. Further, manufacturing appears to be improving, and investment is contributing more meaningfully to economic activity. The likely drag that Hurricanes Harvey and Irma placed on third quarter activity is expected to be more than offset next 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.