Wednesday, September 20, 2017

Dynamic equilibrium versus the Federal Reserve

The Fed is out with its forecast from its September meeting, and it effectively projects constant inflation and unemployment over the next several years. One thing that I did think was interesting is that if the Fed forecast is correct, then the dynamic equilibrium recession detection algorithm would predict a recession in 2019 (which is where it currently forecasts one unless the unemployment rate continues to fall):

This happens to be where the two forecasts diverge (the dynamic equilibrium model is a conditional forecast in the counterfactual world where there is no recession in the next several years [1]).

Here is an update versus the FRBSF forecast as well (post-forecast data in black):



[1] While it can't predict the timing of a recession, it does predict the form: the data will rise several percent above the path (depending on the size of the recession) continuing the characteristic "stair-step" appearance of the log-linear transform of the data:


  1. Yep. Just eyeballing the data I reckon you get a similar vibe

    The end of 2018 will be a turning point for US economy.


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