We would like to share with our clients the latest insights from some important tools:
FRB/US Modeling and the CME FedWatch Tool. We then compare those predictions to the OECD and the New York Fed Forecasts.
FRB/US Modeling
We previously introduced you to the FRB/US modeling in a previous blog post.
FRB/US is a large-scale estimated general equilibrium model of the U.S. economy that was developed at the Federal Reserve Board, with the Python model last updated as follows:
Python model: May 8, 2023
Data Package: January 4, 2024
We always load the latest "test data" and we have been running various models for insights into the next few quarters.
The economic models used before the COVID-19 pandemic, which were effective in normal conditions, have struggled to accurately predict the inflationary impacts resulting from the pandemic's unique economic and monetary challenges. The unforeseen nature of such a "Black Swan" event has exposed limitations in these models, evident in the discrepancy between their predictions and the actual economic outcomes during this period.
The newly developed economic models present an intriguing approach to forecasting, yet their effectiveness and precision in real-world scenarios remain under scrutiny. As these models venture to navigate the complexities of post-pandemic economic conditions, their predictive validity will be closely observed and tested against unfolding economic events.
The significant broadening of the confidence interval in the latest stochastic simulation could signify an increased acknowledgment of the complexities involved in current economic forecasting. This adjustment might reflect a dual strategy: addressing the inherent challenges in generating reliable simulations under uncertain conditions and a deliberate choice to encompass a wider array of potential scenarios. Regardless of the underlying rationale, the expanded interval underscores the practical limitations in the model's applicability, hinting at the nuanced trade-off between breadth of coverage and precision in prediction.
The CME FedWatch Tool
The CME fedWatch Tool is here. If you're not familiar with this tool, this brief video is the fastest way to become familiar with it. Looking at the forecast for the 20 March Fed meeting, the CME is very confident (97%) that the current fed rate remains unchanged.
Looking at the 1 May meeting, it predicts only a 24.1% chance of a quarter point reduction.
By 12 June, the model predicts a 70.1% chance of a reduction in the Fed rate. It predicts a 55.9% chance of a quarter point reduction.
It predicts a 15.5% chance of a half point reduction.
The OECD Inflation Forecast
The OECD inflation forecast looks a bit smoother than the FRB/US models.
The New York Fed DSGE Model
The New York Fed DSGE Model is here.
It is in line with the Fed's expectations as articulated today by Chair Jerome Powell.
Comments