This publish presents an replace of the financial forecasts generated by the Federal Reserve Financial institution of New York’s dynamic stochastic common equilibrium (DSGE) mannequin. We describe very briefly our forecast and its change since December 2022. Be aware that this forecast was produced on February 27, and therefore must be seen as reflecting the state of the economic system earlier than the present banking sector turmoil.
As standard, we want to remind our readers that the DSGE mannequin forecast will not 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 knowledge launched by way of 2022:This fall, augmented for 2023:Q1 with the median forecasts for actual GDP progress and core PCE inflation from the February release of the Philadelphia Fed Survey of Professional Forecasters (SPF), in addition to the yields on 10-year Treasury securities and Baa-rated company bonds primarily based on 2022:This fall averages as much as February 27. Furthermore, beginning in 2021:This fall, the anticipated federal funds fee between one and 6 quarters into the longer term is restricted to equal the corresponding median level forecast from the most recent obtainable Survey of Major Sellers (SPD) within the corresponding quarter. For the present projection, that is the January/February SPD.
A key problem in making sense of current developments within the U.S. economic system, at the least earlier than the present monetary turmoil, centered on explaining the evolution of inflation (the truth that it has began to say no relative to its peak in 2022), along with the truth that the economic system remained at the least as sturdy because it was a 12 months in the past, if not stronger—regardless of a 450 foundation level enhance within the fed funds fee over that point. The mannequin defined these developments by postulating that: (1) inflation was primarily pushed by cost-push shocks in 2021 and early 2022, the consequences of that are beginning to vanish, albeit slowly, and (2) the true economic system turned out to be considerably extra resilient than anticipated a 12 months in the past.
The change within the forecast relative to December is according to this general narrative. Output progress is projected to be larger for 2023 than in December (0.2 % versus -0.3 %). The present forecast for 2024 is on par with the December forecast at 0.0 %. The mannequin factors to a different 12 months of 0.0 % progress in 2025, whereas in December output was anticipated to increase by 0.4 % by the top of that 12 months. The likelihood of a not-so-soft recession, outlined as four-quarter GDP progress dipping under -1 %, by the top of 2023 has declined to 41 %, down from about 50 % in December and 70 % in September. Once more, this likelihood doesn’t replicate the implications of the present banking turmoil. The mannequin expects the output hole to be constructive however stay comparatively regular over the forecast horizon, reaching 1.3 % on the finish of 2023, 1.4 % in 2024, and 1.2 % in 2025. This contrasts with the decline forecasted in December (1.1 % in 2023, dropping to 0.5 % in 2024, after which to 0.0 in 2025). In step with the narrative outlined above, the March inflation projections are a bit extra elevated in any respect forecast horizons compared to December (3.5 versus 3.4 % in 2023, 3.0 versus 2.8 % in 2024, and a couple of.9 versus 2.6 % in 2025), though inflation remains to be projected to say no over the forecast horizon.
Financial coverage is predicted to be tighter in absolute phrases relative to December, in line with the January/February SPD. Relative to the anticipated path for the true pure fee of curiosity, nonetheless, coverage as projected by the mannequin might not be far more restrictive than it was in December. The r* forecasts stay at 2.0 for 2023 however have elevated by about 10 foundation factors in 2024 and 2025 to succeed in 1.7 and 1.4 %, respectively.
Forecast Comparability
| 2023 | 2024 | 2025 | 2026 | |||||
|---|---|---|---|---|---|---|---|---|
| Mar | Dec | Mar | Dec | Mar | Dec | Mar | Dec | |
| GDP progress (This fall/This fall) |
0.2 (-3.7, 4.1) |
-0.3 (-5.0, 4.5) |
0.0 (-5.0, 4.9) |
0.0 (-5.0, 4.8) |
0.0 (-5.2, 5.2) |
0.4 (-4.9, 5.6) |
0.5 (-5.1, 6.2) |
0.9 (-4.6, 6.4) |
| Core PCE inflation (This fall/This fall) |
3.5 (2.9, 4.1) |
3.4 (2.7, 4.2) |
3.0 (2.2, 3.9) |
2.8 (1.9, 3.7) |
2.9 (2.0, 3.9) |
2.6 (1.6, 3.6) |
3.0 (1.9, 4.1) |
2.6 (1.5, 3.7) |
| Actual pure fee of curiosity (This fall) |
2.0 (0.7, 3.3) |
2.0 (0.6, 3.4) |
1.7 (0.1, 3.2) |
1.6 (0.0, 3.1) |
1.4 (-0.2, 3.0) |
1.3 (-0.3, 2.9) |
1.3 (-0.4, 2.9) |
1.2 (-0.5, 2.9) |
Notes: This desk lists the forecasts of output progress, core PCE inflation, and the true pure fee of curiosity from the March 2023 and December 2022 forecasts. The numbers exterior parentheses are the imply forecasts, and the numbers in parentheses are the 68 % bands.
Forecasts of Output Progress
Notes: These two panels depict output progress. Within the high panel, the black line signifies precise knowledge and the pink line exhibits 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 exhibits the present forecast (quarter-to-quarter, annualized), and the grey line exhibits the December 2022 forecast.
Forecasts of Inflation
Notes: These two panels depict core private consumption expenditures (PCE) inflation. Within the high panel, the black line signifies precise knowledge and the pink line exhibits 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 exhibits the present forecast (quarter-to-quarter, annualized), and the grey line exhibits the December 2022 forecast.
Actual Pure Price of Curiosity
Notes: The black line exhibits the mannequin’s imply estimate of the true pure fee of curiosity; the pink line exhibits the mannequin forecast of the true pure fee. 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.
Donggyu Lee is a analysis economist in Macroeconomic and Financial Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
Ramya Nallamotu is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Sikata Sengupta is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
The way to cite this publish:
Marco Del Negro, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta, “The New York Fed DSGE Mannequin Forecast—March 2023,” Federal Reserve Financial institution of New York Liberty Road Economics, March 24, 2023, https://libertystreeteconomics.newyorkfed.org/2023/03/the-new-york-fed-dsge-model-forecast-march-2023/.
Disclaimer
The views expressed on this publish are these of the writer(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 accountability of the writer(s).
