This publish presents an replace of the financial forecasts generated by the Federal Reserve Financial institution of New York’s dynamic stochastic basic equilibrium (DSGE) mannequin. We describe very briefly our forecast and its change since March 2022.
As standard, we want to remind our readers that the DSGE mannequin forecast shouldn’t be an official New York Fed forecast, however solely an enter to the Analysis employees’s general forecasting course of. For extra details about the mannequin and variables mentioned right here, see our DSGE model Q & A.
The New York Fed mannequin forecasts use information launched by 2022:Q1, augmented for 2022:Q2 with the median forecasts for actual GDP development and core PCE inflation from the May release of the Philadelphia Fed’s Survey of Professional Forecasters (SPF), in addition to the yields on 10-year Treasury securities and Baa company bonds primarily based on 2022:Q2 averages as much as Might 27. As well as, for 2021:This autumn and every subsequent quarter, the anticipated federal funds price between one and 6 quarters into the long run is restricted to equal the corresponding median level forecast from the newest accessible Survey of Major Sellers (SPD) in that quarter. For the present projection, that is the May 2022 SPD.
The mannequin’s outlook is significantly extra pessimistic than it was in March. It tasks inflation to stay elevated in 2022 at 3.8 %, up a full share level relative to March, and to say no solely step by step towards 2 % thereafter (2.5 and a couple of.1 % in 2023 and 2024, respectively). This disinflation path is accompanied by a not-so-soft touchdown: the mannequin predicts modestly destructive GDP development in each 2022 (-0.6 % versus 0.9 % in March) and 2023 (-0.5 % versus 1.2 %). In line with the mannequin, the likelihood of a smooth touchdown—outlined as four-quarter GDP development staying optimistic over the subsequent ten quarters—is barely about 10 %. Conversely, the probabilities of a tough touchdown—outlined to incorporate not less than one quarter within the subsequent ten wherein four-quarter GDP development dips under -1 %, as occurred throughout the 1990 recession—are about 80 %.
Modifications within the near-term forecasts for GDP development and core PCE inflation relative to March replicate two components. The primary is a continuation of the cost-push shocks which have hit the economic system since early 2021, leading to the next projection for inflation and a considerably decrease projection for output development. The second issue is tighter financial coverage in 2022 and 2023, with the federal funds price following a a lot steeper path over the subsequent 12 months and a half than the one projected in March. This anticipated path for the coverage price is decided by a model of common inflation focusing on (AIT), augmented with anticipated coverage shocks and knowledgeable by expectations from the Survey of Major Sellers (SPD), as described above. This tighter coverage path in comparison with March is a drag on actual exercise over the subsequent few quarters, nevertheless it has a limited effect on the projected course of inflation as a result of flatness of the model’s estimated Phillips curve.
The actual federal funds price implied by these forecasts shortly approaches the pure price of curiosity, which is round 1 %, reaching it in 2023 and modestly overshooting it for the remainder of the forecast horizon. Partly reflecting the tighter path of coverage, the output hole turns destructive within the medium time period, declining from 0 % on the finish of 2022 to -1.7 % in 2023 and -2.6 % in 2024.
| 2022 | 2023 | 2024 | 2025 | |||||
|---|---|---|---|---|---|---|---|---|
| Jun | Mar | Jun | Mar | Jun | Mar | Jun | Mar | |
| GDP development (This autumn/This autumn) |
-0.6 (-3.6, 2.3) |
0.9 (-0.8, 2.6) |
-0.5 (-5.0, 4.0) |
1.2 (-0.6, 3.1) |
0.4 (-4.4, 5.3) |
1.5 (-0.3, 3.4) |
1.4 (-3.9, 6.5) |
1.8 (-0.1, 3.6) |
| Core PCE inflation (This autumn/This autumn) |
3.8 (3.3, 4.4) |
2.8 (2.1, 3.6) |
2.5 (1.7, 3.4) |
2.2 (1.3, 3.1) |
2.1 (1.2, 3.1) |
2.0 (1.1, 3.0) |
2.0 (1.0, 3.0) |
2.0 (1.0, 3.0) |
| Actual pure price of curiosity (This autumn) |
0.9 (-0.4, 2.1) |
0.0 (-1.3, 1.4) |
0.9 (-0.5, 2.4) |
0.4 (-1.1, 1.9) |
0.9 (-0.7, 2.4) |
0.6 (-1.0, 2.1) |
0.8 (-0.9, 2.5) |
0.6 (-1.1, 2.3) |
Notes: This desk lists the forecasts of output development, core PCE inflation, and the actual pure price of curiosity from the June 2022 and March 2022 forecasts. The numbers exterior parentheses are the imply forecasts, and the numbers in parentheses are the 68 % bands.
Forecasts of Output Development
Notes: These two panels depict output development. Within the prime panel, the black line signifies precise information and the pink line reveals the mannequin forecasts. The shaded areas mark the uncertainty related to our forecasts at 50, 60, 70, 80, and 90 % likelihood intervals. Within the backside panel, the blue line reveals the present forecast (quarter-to-quarter, annualized), and the grey line reveals the March 2022 forecast.
Forecasts of Inflation
Notes: These two panels depict core private consumption expenditures (PCE) inflation. Within the prime panel, the black line signifies precise information and the pink line reveals the mannequin forecasts. The shaded areas mark the uncertainty related to our forecasts at 50, 60, 70, 80, and 90 % likelihood intervals. Within the backside panel, the blue line reveals the present forecast (quarter-to-quarter, annualized), and the grey line reveals the March 2022 forecast.
Actual Pure Price of Curiosity
Notes: The black line reveals the mannequin’s imply estimate of the actual pure price of curiosity; the pink line reveals the mannequin forecast of the actual pure price. The shaded space marks the uncertainty related to the forecasts at 50, 60, 70, 80, and 90 % likelihood intervals.
Marco Del Negro is an financial analysis advisor in Macroeconomic and Financial Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
Aidan Gleich is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Shlok Goyal is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Alissa Johnson is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Andrea Tambalotti is an financial analysis advisor in Macroeconomic and Financial Research within the Financial institution’s Analysis and Statistics Group.
Learn how to cite this publish:
Marco Del Negro, Aidan Gleich, Shlok Goyal, Alissa Johnson, and Andrea Tambalotti, “The New York Fed DSGE Mannequin Forecast—June 2022,” Federal Reserve Financial institution of New York Liberty Road Economics, June 17, 2022, https://libertystreeteconomics.newyorkfed.org/2022/06/the-new-york-fed-dsge-model-forecast-june-2022/.
Disclaimer
The views expressed on this publish are these of the creator(s) and don’t essentially replicate the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the duty of the creator(s).
