https://www.wsj.com/articles/interest-rates-are-well-below-w…
**Interest Rates Are Well Below What Academic Formulas Suggest, Fed Report Says**
**Policy rules used to guide central bank call for a rate between 4% and 7%, report says; Fed raised rates to a range between 1.5% and 1.75%**
**By Nick Timiraos, The Wall Street Journal, Updated June 17, 2022**
**Several simple mathematical formulas used to inform where interest rates should be set under current economic conditions show that high inflation would call for the Federal Reserve to set rates between 4% and 7% this year, according to a report released by the central bank on Friday....**
**According to a New York Fed model, a so-called soft landing in which growth in annual gross domestic product slows but stays positive over the next 2 1/2 years has just a 10% probability. Meanwhile, the probability of a hard landing, in which annual GDP growth falls below -1% in at least one quarter over the next 2 1/2 years, is about 80%, the model estimated. ``**[end quote]
[https://libertystreeteconomics.newyorkfed.org/2022/06/the-ne...](https://libertystreeteconomics.newyorkfed.org/2022/06/the-new-york-fed-dsge-model-forecast-june-2022/)
**New York Federal Reserve, Liberty Street Economics**
**June 17, 2022**
**The New York Fed DSGE [dynamic stochastic general equilibrium] Model Forecast—June 2022**
**by Marco Del Negro, Aidan Gleich, Shlok Goyal, Alissa Johnson, and Andrea Tambalotti**
**...**
**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....**
``The real federal funds rate implied by these forecasts quickly approaches the natural rate of interest, which is around 1 percent, reaching it in 2023 and modestly overshooting it for the rest of the forecast horizon… [end quote]
The real fed funds rate of 1% PLUS INFLATION would be 1 + 3.8 = 4.8% in 2022 and 3.5% in 2023.
The current fed funds rate is 1.5% - 1.75% (including this week's hike) and will be 2.25% in July if the Fed hikes 0.75% then. That's much lower than what the model predicts.
The model rather optimistically predicts an immediate decline in inflation from today. The Fed has been mistakenly optimistic about inflation in the recent past.
The Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, rose 6.3% in April from a year earlier, near a 40-year high.
If the Fed actually does raise the fed funds rate to inflation + 1% (which makes sense because anything less than that is giving away free money and stimulative) the rate will be much higher -- double or more -- what it is now.
Anyone who thinks the markets have hit bottom...ain't seen nothing yet.
Wendy