In this note we examine the consequences for the FRB-US model should the Federal Reserve adopt a significantly more aggressive pace of monetary easing than currently anticipated. While this may still appear an extreme scenario, recent developments suggest that it can no longer be ruled out entirely. The analysis is designed to clarify how such a policy deviation would propagate through growth, unemployment, inflation, and financial variables over the medium term.
The baseline
As a reminder, we begin with the baseline. Figure 1 plots the model’s current projection, shown in red, against the Fed’s June SEP in blue. As mentioned in previous communication, the current FRB baseline incorporates only a single rate cut in 2025, in contrast to the two cuts outlined in the June SEP. This difference highlights the more cautious stance embedded in the model, which resists early easing given prevailing inflation and unemployment dynamics.
Figure 1. FRB-US forecast – real-side variables.
Note: Real GDP growth and core inflation are expressed on a year-over-year basis. Core inflation refers to core PCE price inflation. The red lines are the model forecast, while the blue lines are the latest SEP.
Figure 2. Update FRB-US forecast – financial variables.
The “crazy” Fed scenarios
Figure 2 then contrasts this baseline with two counterfactuals. The first scenario (the green lines) assumes that the Fed delivers three rate cuts in 2025. The second, more aggressive scenario (the gray lines), envisages the funds rate declining to 2.5 percent by mid-2026 and remaining at that level thereafter. Both alternatives are imposed exogenously, overriding the model’s endogenous interest rate setting. Left unconstrained, the model would not generate such an easing path, reflecting its view that fundamentals only justify one reduction in 2025.
Figure 2. FRB-US baseline and scenarios.
Note: the red lines indicate the current FRB-US baseline. The green and gray lines indicate the two constructed scenarios.
The implications are straightforward yet significant. Under both scenarios the economy grows more robustly, with the unemployment rate falling further, particularly under the aggressive easing path. Nonetheless, the level of activity remains only modestly above potential (now estimated at 1.8% in the model). This limitation stems from structural headwinds, notably the slower expansion of the labor force, which curtails the economy’s ability to sustain stronger momentum. Thus, even with monetary support, the model signals only a moderate uplift in underlying growth.
We have also traced the implications for financial variables, focusing on the five-, ten-, and thirty-year maturities. In the model, term premia evolve endogenously in response to inflation and debt dynamics. However, it is difficult to model the erosion of policy credibility within a framework that is, by construction, rational. This suggests that the model may understate the extent of upward pressure on long-term yields under an aggressive easing regime. In reality, the market could demand a higher risk premium, leading to a more pronounced steepening of the curve than our simulations currently show.
Conclusion
The overall conclusion is nuanced. It is certainly possible that the Fed may choose to cut more aggressively than fundamentals would imply, either for political reasons or because policymakers place greater weight on downside risks to the labor market, as Powell hinted at Jackson Hole. The model indicates that such a strategy would eventually carry a cost in terms of higher inflation, though this cost would not materialize immediately. Instead, the near-term benefits of stronger growth and lower unemployment would be front-loaded, while the inflationary consequences would be deferred, surfacing only toward the end of the forecast horizon. This lag increases the risk of policy error: it creates a window in which monetary policy may appear successful, even as it sets the stage for a renewed inflation problem that would emerge only later and require a more painful adjustment.