The Federal Reserve Bank of New York's forecasting model projects economic growth will nearly grind to a halt over the next two years, with GDP expanding just 0.1 percent in 2027 and 0.5 percent in 2028, according to the September 2026 update of its dynamic stochastic general equilibrium model released Thursday. At the same time, the model expects core inflation to remain above the Federal Reserve's 2 percent target through 2028, reaching 2.1 percent next year and 1.8 percent in 2028. The forecasts represent a downgrade from June, when the model anticipated slightly stronger growth and a quicker return to the Fed's inflation goal.
For 2026, the model held its growth forecast steady at 1.2 percent, unchanged from June's projection. But the outlook darkens considerably after that: growth projections for 2027, 2028, and 2029 now stand at 0.1, 0.5, and 1.2 percent respectively, down from 0.2, 0.7, and 1.5 percent in the June forecast. Core inflation projections climbed across the board, with estimates for 2026, 2027, 2028, and 2029 now at 3.3, 2.1, 1.8, and 1.8 percent, compared to the June figures of 3.1, 1.8, 1.6, and 1.7 percent. The model's estimate for the real natural rate of interest—the rate consistent with stable prices and full employment—ticked down slightly to 1.9 percent for 2026 from 2.0 percent in June, but edged higher for later years at 1.8, 1.4, and 1.2 percent for 2027 through 2029.
The model "remains pessimistic on growth, and keeps being surprised when the economy turns out to be stronger than it expected," the authors write. The Survey of Professional Forecasters projects third-quarter 2026 GDP growth more than 1 percentage point higher in annualized terms than the model anticipated in June, a gap the model attributes to more favorable financial conditions and the positive effects of AI-driven investment growth. The report notes that the model now expects inflation to return toward the Fed's long-run 2 percent goal more slowly than it did in June, partly because lower total factor productivity growth translates into higher inflation.
The pessimistic growth outlook stems from two key shifts in the model's assumptions since June. First, the model now expects monetary policy to be more restrictive than it previously forecast, meaning higher interest rates will weigh more heavily on economic activity. Second, the model revised downward its expectations for total factor productivity growth—a measure of how efficiently the economy converts inputs into output. That downgrade matters because weaker productivity growth not only crimps economic expansion but also fuels inflation by raising the cost of producing goods and services. The model's repeated forecast misses on the downside suggest it may be underestimating economic resilience, particularly the boost from AI-related capital spending. But if the model's assumptions about tighter monetary policy and sluggish productivity gains prove correct, the U.S. economy faces a prolonged period of anemic growth paired with inflation that stays stubbornly above target—a combination that would leave the Federal Reserve with few good options.