The U.S. economy is very likely on a path to shrink this year and next, a Federal Reserve Bank of New York report said on Friday.

According to how the New York Fed models the economy’s path, the report said that “the chances of a hard landing…as occurred during the 1990 recession are about 80%,” while the probability of a “soft landing,” in which gross domestic product essentially remains positive over the next 10 quarters, is 10%.

The report said the New York Fed’s model predicts a 0.6% contraction for this year and a 0.5% downturn in 2023, with inflation remaining very elevated this year before waning next year and later.

The outlook is more pessimistic than what the model predicted in March. New York Fed economists tied the change to surging inflation and a more aggressive monetary policy response by the Fed than previously expected.

The New York Fed’s report followed the central bank on Wednesday raising its short-term interest rate target by three quarters of a percentage point, the most aggressive increase in short-term borrowing costs since 1994.

The move was larger than what Fed officials signaled ahead of this week’s Federal Open Market Committee meeting. After the meeting, Fed Chairman

Jerome Powell
said another 50 or 75 basis point rate increase was likely at the July FOMC meeting, as the central bank moves aggressively to try to ratchet down the worst inflation readings in four decades.

Fed officials have said lowering inflation closer to their 2% target is now the central bank’s main mission, and Mr. Powell said Wednesday he doesn’t believe a downturn is a certain outcome of the Fed raising interest rates. The Fed is “not trying to induce a recession,” he said.

Forecasts released by the Fed as part of its policy meeting projected a modest rise in unemployment in the wake of the expected path of rate rises, but didn’t point to a downturn.

But many outside observers, including former central bankers, believe the actions the Fed must take will contribute to a recession.

“I don’t expect the recession to be very near term,” former New York Fed leader

William Dudley
said on Tuesday at a Wall Street Journal event. “I think this is mostly a 2023-24 story, in terms of a hard landing. But I do continue to think that a hard landing is very likely, and obviously the more persistent the inflation is, the higher inflation is for longer and that makes the hard landing risk go up.”

The New York Fed cautioned in its report that its model’s outlook isn’t an official forecast of the central bank. The most recent recession was triggered by the onset of the pandemic and was unusually short, between February and April 2020. The prior recession occurred between December 2007 and April 2009 due to the collapse of financial markets.

A recession is widely understood as two consecutive quarters of negative economic growth, though the National Bureau of Economic Research, which is responsible for marking expansions and downturns, says a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Write to Michael S. Derby at