Monday Morning Scoop - The New York Fed's Economic Forecast Gets a Lot Brighter

The New York Fed’s Economic Forecast Gets a Lot Brighter

The new post and economic forecast model from the Federal Reserve Bank of New York might not be accompanied by “Happy Days Are Here Again,” but it contains some of the most upbeat forward-looking consideration of the future.

The New York Fed’s dynamic stochastic general equilibrium (DSGE) model — not an “official” New York Fed forecast, but an input to the overall forecasting process — suggests that the core inflation of 3.7% in 2023 will cool to 2.5% by the end of 2024 and over two more years down to 2.1% as 2026 closes. GDP growth of 1.0% this year would slow to 0.4% by 2025 and then back to 0.9% the following year. The natural rate of interest — the rate supporting maximum economic output and full employment — would drop from 2.2% this year to 1.3% by 2026.

“The change in the forecast relative to March is very substantial. Output growth is projected to be much higher throughout the forecast horizon than in March (1.0, 0.7, and 0.4 percent in 2023, 2024, and 2025 versus 0.2, 0.0, and 0.0 in March, respectively),” the New York Fed wrote in a blog post. “The probability of a not-so-soft landing, defined as four-quarter GDP growth dipping below -1 percent, by the end of 2023 has declined to 26 percent from 41 percent in March and 70 percent last September.”

The 2023 inflation projections are somewhat higher because the rate in the first quarter “once more surprised to the upside relative to the SPF forecasts in February,” but is still significantly lower than the 3.0% in 2024 and 2.9% in 2025 than the March forecast.

The changes have everything to do with the Survey of Professional Forecasters conducted by the Philadelphia Fed. The long-term inflation projections were down by 45 basis points in the first quarter of 2023 from the figures from 2022 Q4. Driving the inflation expectation is higher projected total factor productivity growth.

“Were it not for this data point, output and inflation projections would be a lot closer to those in March, with inflation actually a bit stronger throughout the horizon and output growth higher only in the short term,” wrote the Fed. “While the dependence of the forecast on one data point makes us uncomfortable, we chose to follow standard practice and incorporate it in the projections. Nonetheless, this dependence should be kept in mind.”

By: Erik Sherman
Source: GlobeStreet