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: This recession call is coming from inside the house. Why one New York Fed model is so bleak.

Economists are tripping over themselves to forecast the probability of a recession as the Federal Reserve hikes interest rates and inflation sticks around at sky-high levels.

One of the bleakest forecasts, however, comes from the New York Fed.

First, the caveat. This is not the official forecast from the regional central bank, which gets used in the Fed’s summary of economic projections. Instead, it’s a dynamic stochastic general equilibrium model. That’s a mouthful, but it’s a standard way that economists make predictions. A review from a decade ago says these models perform poorly, but other forecasts do equally poorly, which is probably a good way to frame any economist prediction more than three months into the future.

Anyway, onto the grim prediction. This New York Fed model says the U.S. economy will contract this year, as well as next. The New York Fed model’s prediction of a contraction by 0.6% this year, and another 0.5% next year, compares with the Fed’s median forecast for 1.7% growth this year and next.

The New York Fed model assigns an 80% probability to a hard landing, which it defines of at least quarter out of the next ten in which the four-quarter GDP growth dips below 1%. And it expects inflation a full percentage point higher this year than the official Fed forecast.

Why is it so pessimistic, particularly relative to March when the same model forecast 0.9% growth in 2022 and 1.2% growth in 2023? “The first is a continuation of the cost-push shocks that have hit the economy since early 2021, resulting in a higher projection for inflation and a somewhat lower projection for output growth. The second factor is tighter monetary policy in 2022 and 2023, with the federal funds rate following a much steeper path over the next year and a half than the one projected in March,” said a blog from the regional central bank.

U.S. stock futures
ES00,
+1.43%

on Tuesday were pointing to an advance, after the worst weekly drop for the S&P 500
SPX,
+0.22%

since the pandemic.

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