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 second quarter of 2019 grew at a trend-like pace of 2.0 percent after growing at a healthy 3.1 percent in the previous quarter. Behind the headline number was considerable strength in final sales and consumption, which grew at 3.0 percent and 4.7 percent respectively. The third quarter is shaping up much like the second, with estimates of growth in the 1.5–2.5 percent range. The consumption-driven growth is supported by strong fundamentals, including solid job and income growth, accommodative financial conditions, and booming equity markets. Retail sales are exhibiting strong momentum, and motor vehicle sales remain at high levels, indicating that third-quarter consumption growth will likely exceed 3.0 percent. Overall, readings on consumer confidence remain elevated, and this is especially true of the Consumer Confidence index from the Conference Board.

[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, Gillian Courtney, and Catherine O’Donnell for their assistance.