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December 16, 2022

The New York Fed DSGE Model Forecast—December 2022

Marco Del Negro, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta

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 September 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.

The New York Fed model forecasts use data released through 2022:Q3, augmented for 2022:Q4 with the median forecasts for real GDP growth and core PCE inflation from the November release of the Philadelphia Fed Survey of Professional Forecasters (SPF), as well as the yields on 10-year Treasury securities and Baa-rated corporate bonds based on 2022:Q4 averages up to November 16. Moreover, starting in 2021:Q4, 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 the corresponding quarter. For the current projection, this is the November SPD.

Compared to September, the outlook is again more pessimistic in terms of inflation but not very different in terms of real activity, except for 2022. Once again, the model has upgraded its assessment of the underlying state of the real economy compared to September, as evidenced by significantly higher projections for the real natural rate of interest (2.6 percent versus 1.4 percent for 2022, 2.0 percent versus 1.2 percent for 2023, and 1.6 percent versus 1.0 percent for 2024). And again, policy is expected to be substantially tighter than in September, especially in 2023, offsetting the model’s changed assessment of underlying economic strength.

Output growth is projected to be higher for 2022 (0.2 percent versus -0.7 percent), largely as a result of the fact that Q3 growth was higher than nowcasted by the SPF, but only slightly different from the previous projections thereafter (-0.3 percent versus -0.4 percent in 2023, -0.0 percent versus 0.1 percent in 2024, and 0.4 percent versus 0.7 percent in 2025). The model still sees a recession over the next few quarters as likely. However, compared to June and September, the risk of a not-so-soft landing has diminished considerably. The probability of four-quarter GDP growth dipping below -1 percent, as occurred during the 1990 recession, before the end of 2023 has fallen from 70 percent in September to 50 percent.

In line with the upgraded assessment of the underlying strength of the economy, the model views higher inflation as less due to transitory factors such as supply disruptions and more to persistent factors. The model projects inflation to be 4.8 percent in 2022, up 0.7 percentage point relative to September, and to decline only gradually thereafter (to 3.4, 2.8, and 2.6 percent in 2023, 2024, and 2025, respectively, versus 3.1, 2.6, and 2.4 in September). Because of the flat Phillips curve, tighter policy has a limited effect on the projected course of inflation.

Forecast Comparison

2022202320242025
DecSepDecSepDecSepDecSep
GDP growth
(Q4/Q4)		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
(Q4/Q4)		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) 
Real natural rate of interest
(Q4)		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) 
Source: Authors’ calculations.
Notes: This table lists the forecasts of output growth, core PCE inflation, and the real natural rate of interest from the December 2022 and September 2022 forecasts. The numbers outside parentheses are the mean forecasts, and the numbers in parentheses are the 68 percent bands.

Forecasts of Output Growth

Source: Authors’ calculations.
Notes: These two panels depict output growth. In the top panel, the black line indicates actual data and the red line shows the model forecasts. The shaded areas mark the uncertainty associated with our forecasts at 50, 60, 70, 80, and 90 percent probability intervals. In the bottom panel, the blue line shows the current forecast (quarter-to-quarter, annualized), and the gray line shows the June 2022 forecast.

Forecasts of Inflation

Source: Authors’ calculations.
Notes: These two panels depict core personal consumption expenditures (PCE) inflation. In the top panel, the black line indicates actual data and the red line shows the model forecasts. The shaded areas mark the uncertainty associated with our forecasts at 50, 60, 70, 80, and 90 percent probability intervals. In the bottom panel, the blue line shows the current forecast (quarter-to-quarter, annualized), and the gray line shows the June 2022 forecast.

Real Natural Rate of Interest

Source: Authors’ calculations.
Notes: The black line shows the model’s mean estimate of the real natural rate of interest; the red line shows the model forecast of the real natural rate. The shaded area marks the uncertainty associated with the forecasts at 50, 60, 70, 80, and 90 percent probability intervals.
Photo: portrait of Marco Del Negro

Marco Del Negro is an economic research advisor in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Aidan Gleich is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Photo: portrait of Donggyu Lee

Donggyu Lee is a research economist in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Ramya Nallamotu is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Sikata Sengupta is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:
Marco Del Negro, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta, “The New York Fed DSGE Model Forecast—December 2022,” Federal Reserve Bank of New York Liberty Street Economics, December 16, 2022, https://libertystreeteconomics.newyorkfed.org/2022/12/the-new-york-fed-dsge-model-forecast-december-2022/.

You may also be interested in:

Drivers of Inflation: The New York Fed DSGE Model’s Perspective

Photo: decorative; numbers with line chart on top

The New York Fed DSGE Model Forecast—September 2022

Federal Reserve System Conference on the Financial Stability Considerations for Monetary Policy

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The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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