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MNI BRIEF: New York Fed's DSGE Model Predicts Bumpy Landing

(MNI) Washington
(MNI)

The New York Federal Reserve's dynamic stochastic general equilibrium (DSGE) model updated on Friday shows the probability of a soft landing—defined as four-quarter GDP growth staying positive over the next ten quarters—is only about 10 percent.

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%. This is because with a flat Phillips curve it sees the so-called sacrifice ratio as being elevated. The DSGE model forecast is not an official New York Fed forecast. Former officials have told MNI inflation expectations have already become unmoored, something that may lead to tighter monetary policy and curb growth. (See: MNI: Inflation Expectations Already Unmoored -Ex-Fed Officials)

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The New York Federal Reserve's dynamic stochastic general equilibrium (DSGE) model updated on Friday shows the probability of a soft landing—defined as four-quarter GDP growth staying positive over the next ten quarters—is only about 10 percent.

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%. This is because with a flat Phillips curve it sees the so-called sacrifice ratio as being elevated. The DSGE model forecast is not an official New York Fed forecast. Former officials have told MNI inflation expectations have already become unmoored, something that may lead to tighter monetary policy and curb growth. (See: MNI: Inflation Expectations Already Unmoored -Ex-Fed Officials)