This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since [March 2022]( https://libertystreeteconomics.newyorkfed.org/2022/03/the-new-york-fed-dsge-model-forecastmarch-2022/).
As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our [DSGE model Q & A]( https://www.newyorkfed.org/medialibrary/media/research/blog/2018/LSE_dsge-forecast-appendix).
The New York Fed model forecasts use data released through 2022:Q1, augmented for 2022:Q2 with the median forecasts for real GDP growth and core PCE inflation from the [May release of the Philadelphia Fed’s Survey of Professional Forecasters]( https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q2-2022) (SPF), as well as the yields on 10-year Treasury securities and Baa corporate bonds based on 2022:Q2 averages up to May 27. In addition, for 2021:Q4 and each subsequent quarter, the expected federal funds rate between one and six quarters into the future is restricted to equal the corresponding median point forecast from the latest available Survey of Primary Dealers (SPD) in that quarter. For the current projection, this is the [May 2022 SPD]( https://www.newyorkfed.org/medialibrary/media/markets/survey/2022/may-2022-spd-results.pdf).
The model’s outlook is considerably more pessimistic than it was in March. It projects inflation to remain elevated in 2022 at 3.8 percent, up a full percentage point relative to March, and to decline only gradually toward 2 percent thereafter (2.5 and 2.1 percent in 2023 and 2024, respectively). This disinflation path is accompanied by a not-so-soft landing: the model predicts modestly negative GDP growth in both 2022 (-0.6 percent versus 0.9 percent in March) and 2023 (-0.5 percent versus 1.2 percent). According to the model, the probability of a soft landing—defined as four-quarter GDP growth staying positive over the next ten quarters—is only about 10 percent. Conversely, the chances of a hard landing—defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1 percent, as occurred during the 1990 recession—are about 80 percent.
