As the name suggests, under a forecast-based policy regime, policymakers must predict how the economy is likely to respond in the medium term - say, over the next six to eight quarters - to alternative plans for monetary policy.
For example, monetary policy makers might be interested in evaluating a strategy of keeping the federal funds rate low for a period against an alternative plan that implies a gradual rise in rates.7 Under a forecast-based approach, for each policy plan under consideration, the policymakers and their staffs must make their best guess of how the economy is likely to evolve should that plan be implemented.