The New York Fed DSGE Mannequin Forecast—December 2022

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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 September 2022.

As common, we want to remind our readers that the DSGE mannequin forecast just isn’t 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 mannequin Q&A.

The New York Fed mannequin forecasts use knowledge launched via 2022:Q3, augmented for 2022:This fall with the median forecasts for actual GDP progress and core PCE inflation from the November launch of the Philadelphia Fed Survey of Skilled 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 November 16. 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 newest obtainable Survey of Major Sellers (SPD) within the corresponding quarter. For the present projection, that is the November SPD.

In comparison with September, the outlook is once more extra pessimistic by way of inflation however not very totally different by way of actual exercise, apart from 2022. As soon as once more, the mannequin has upgraded its evaluation of the underlying state of the actual financial system in comparison with September, as evidenced by considerably larger projections for the actual pure fee of curiosity (2.6 p.c versus 1.4 p.c for 2022, 2.0 p.c versus 1.2 p.c for 2023, and 1.6 p.c versus 1.0 p.c for 2024). And once more, coverage is anticipated to be considerably tighter than in September, particularly in 2023, offsetting the mannequin’s modified evaluation of underlying financial power.

Output progress is projected to be larger for 2022 (0.2 p.c versus -0.7 p.c), largely because of the truth that Q3 progress was larger than nowcasted by the SPF, however solely barely totally different from the earlier projections thereafter (-0.3 p.c versus -0.4 p.c in 2023, -0.0 p.c versus 0.1 p.c in 2024, and 0.4 p.c versus 0.7 p.c in 2025). The mannequin nonetheless sees a recession over the subsequent few quarters as seemingly. Nevertheless, in comparison with June and September, the chance of a not-so-soft touchdown has diminished significantly. The chance of four-quarter GDP progress dipping under -1 p.c, as occurred throughout the 1990 recession, earlier than the top of 2023 has fallen from 70 p.c in September to 50 p.c.

In step with the upgraded evaluation of the underlying power of the financial system, the mannequin views larger inflation as much less as a consequence of transitory components akin to provide disruptions and extra to persistent components. The mannequin tasks inflation to be 4.8 p.c in 2022, up 0.7 proportion level relative to September, and to say no solely step by step thereafter (to three.4, 2.8, and a couple of.6 p.c in 2023, 2024, and 2025, respectively, versus 3.1, 2.6, and a couple of.4 in September). Due to the flat Phillips curve, tighter coverage has a restricted impact on the projected course of inflation.

Forecast Comparability

2022 2023 2024 2025
Dec Sep Dec Sep Dec Sep Dec Sep
GDP progress
(This fall/This fall)
0.2
 (-0.2, 0.6) 
-0.7
 (-2.3, 0.8) 
-0.3
 (-5.0, 4.5) 
-0.4
 (-5.2, 4.4) 
0.0
 (-5.0, 4.8) 
0.1
 (-4.7, 4.9) 
0.4
 (-4.9, 5.6) 
0.7
 (-4.5, 5.9) 
Core PCE inflation
(This fall/This fall)
4.8
 (4.7, 4.9) 
4.1
 (3.8, 4.4) 
3.4
 (2.7, 4.2) 
3.1
 (2.3, 3.8) 
2.8
 (1.9, 3.7) 
2.6
 (1.7, 3.5) 
2.6
 (1.6, 3.6) 
2.4
 (1.4, 3.4) 
Actual pure fee of curiosity
(This fall)
2.6
 (1.5, 3.7) 
1.4
 (0.2, 2.6) 
2.0
 (0.6, 3.4) 
1.2
 (-0.3, 2.6) 
1.6
 (0.0, 3.1) 
1.0
 (-0.6, 2.6) 
1.3
 (-0.3, 2.9) 
0.9
 (-0.7, 2.6) 
Supply: Authors’ calculations.
Notes: This desk lists the forecasts of output progress, core PCE inflation, and the actual pure fee of curiosity from the December 2022 and September 2022 forecasts. The numbers exterior parentheses are the imply forecasts, and the numbers in parentheses are the 68 p.c bands.

Forecasts of Output Progress

Supply: Authors’ calculations.
Notes: These two panels depict output progress. Within the prime panel, the black line signifies precise knowledge and the crimson line reveals the mannequin forecasts. The shaded areas mark the uncertainty related to our forecasts at 50, 60, 70, 80, and 90 p.c chance intervals. Within the backside panel, the blue line reveals the present forecast (quarter-to-quarter, annualized), and the grey line reveals the June 2022 forecast.

Forecasts of Inflation

Supply: Authors’ calculations.
Notes: These two panels depict core private consumption expenditures (PCE) inflation. Within the prime panel, the black line signifies precise knowledge and the crimson line reveals the mannequin forecasts. The shaded areas mark the uncertainty related to our forecasts at 50, 60, 70, 80, and 90 p.c chance intervals. Within the backside panel, the blue line reveals the present forecast (quarter-to-quarter, annualized), and the grey line reveals the June 2022 forecast.

Actual Pure Price of Curiosity

Supply: Authors’ calculations.
Notes: The black line reveals the mannequin’s imply estimate of the actual pure fee of curiosity; the crimson line reveals the mannequin forecast of the actual pure fee. The shaded space marks the uncertainty related to the forecasts at 50, 60, 70, 80, and 90 p.c chance intervals.
Photo: portrait of Marco Del Negro

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 analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Photo: portrait of Donggyu Lee

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 analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Sikata Sengupta is a analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

How you can cite this publish:
Marco Del Negro, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta, “The New York Fed DSGE Mannequin Forecast—December 2022,” Federal Reserve Financial institution of New York Liberty Avenue Economics, December 16, 2022, https://libertystreeteconomics.newyorkfed.org/2022/12/the-new-york-fed-dsge-model-forecast-december-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).

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