This Fed-Favorite Model Has An Unnerving Prediction For Economic Growth

This Fed-Favorite Model Has An Unnerving Prediction For Economic Growth
Stéphane Renevier, CFA

5 months ago1 min

Interest rate adjustments shake up the economy in a number of ways, and the FRB/US model – one of the Federal Reserve’s (the Fed) go-to tools – can show you just how that goes down. By crunching historical data and using mathematical equations to play out complex economic variables, the model can predict how interest rates might affect everything from consumer spending to job growth.

Take it from Apollo's chief economist, Torsten Slok, who used a variant of the FRB/US model to forecast the fallout from the Fed's recent aggressive rate hikes. And well, buckle up: the model expects turbulence in 2024 and early 2025, much later than the market's more optimistic recovery timeline. And the economy may be hit harder than expected too, dipping about two percentage points lower than it would’ve without the policy changes.

But remember, this is a model we're talking about – it's not psychic. It simplifies the messy real world and rests on assumptions that might not always check out. Plus, its reliance on historical data doesn't necessarily make it a crystal ball for today's economy. But the takeaway is clear: despite slowing inflation giving rise to whispers of a soft landing, the economic slowdown isn't over, and the toughest stretch may be still to come.



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