Goldman, Merrill and UBS are claiming that the Fed's recent inflation warnings, suggesting interest rate hikes, get the housing market and the general direction of the economy all wrong. Chief economists at the three banks feel that the decline in the housing market has spread to the overall economy, which would indicate a bullish view on bonds and even suggest the need for rate cuts. The Fed disagrees and sees a stabilization of the housing market and no major correlation between the recent housing slump and the overall economy.
The three banks contend that a strong labor market has prevented any cuts on the Fed's part thus far, and believe the Fed is coming around to the more bearish view that the economy is still slowing. The Fed has readjusted its time table for a housing recovery and scaled back the forecast on capital expenditures. Despite this, the latest Fed meeting gave no hint of a rate cut, and the 2.3% rise in the Commerce Dept's price index from a year earlier send off inflation warning signals. Also, the banks are often wrong when it comes to predicting the direction of rate changes. Some highlights of Goldman, UBS and Merrill's glorious track record, from Bloomberg:
Goldman projected an increase in June 2002 and the central bank ended up cutting rates the next quarter. UBS expected the Fed to double its target by the end of 2003 to 2.5 percent from 1.25 percent. Instead, the Fed reduced borrowing costs to 1 percent in June 2003.
Merrill had forecast in early 2006 that the Fed would end a series of increases when its benchmark reached 4.5 percent. Instead, the Fed boosted rates to 5.25 percent in June.
Bernanke Is Wrong on Inflation, Goldman, Merrill Say - [Bloomberg]