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 activity in the second quarter grew 4.2 percent, its strongest reading since the third quarter of 2014. According to many nowcasts, growth remains robust in the current quarter and may well exceed 3 percent. The upsurge is being supported by continued strength in business fixed investment and improved consumer spending. The labor market continues to add jobs at a healthy clip, and overall economic fundamentals are sound. There are, however, a number of risks on the horizon, most notably surrounding policies involving foreign trade.
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.