Goldman Sachs raised the probability of recession from 25% to 35% in light of the SVB related turmoil (although their guess is still lower than the consensus). This prompted me to wonder what was the net effect of the turmoil and Fed response (less tightening) on economic activity.

First, the path of Fed funds — as perceived by the market — Sunday vs. a couple weeks ago.

Figure 1: Effective Fed funds (black), implied Fed funds as of March 19 4:30CT (red square), March 14, 1:30 CT (pink square), March 8 (sky blue inverted triangle), and February 15 (green triangle). Source: Fed via FRED, CME Fedwatch and author’s calculations.

By years-end, the implied Fed funds is about 180 bps lower than what was seen almost two weeks ago. Bauer and Swanson (AER 2023) estimate a 100 bps shock results in a 0.24 to 0.60 ppts decrease in growth rate.

Keep reading this article on Econbrowser Blog - James Hamilton & Menzie Chinn.

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