Deutsche Bank: Here's Why The Fed's Economic Forecasts Are Wrong

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Deutsche Bank has come out and called the latest Federal Reserve forecast for the U.S. economy as too conservative.

They believe GDP will be higher, unemployment lower, and inflation higher than what the Fed expects this year.

Deutsche Bank:

“In general, we are anticipating a more “V-shaped” recovery, with growth accelerating more quickly than policymakers project—hence a more substantial improvement in the labour market. However, this also means that growth levels-out sooner, as well, which is why our growth forecast for 2011 is below the range of policymakers.”

But note the nuance — faster growth now, then slower growth later. This has a particularly interesting investment implication…

Deutsche believes the Fed's forecast are too conservative in 2010, but then too bullish in 2011

Source: Deutsche Bank

Near term we're looking good...

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

Source: Deutsche Bank

But.. the Fed won't hike interest rates until Q1 2011 and deflation will be a threat

Source: Deutsche Bank

Source: Deutsche Bank

Thus stocks are not the answer since the economy will stagnate over the 2-year stretch

'Buy Bonds, Sell Stocks: 10Y Treasury yields will continue to grind lower towards 2.5% on renewed concerns for risk assets and deflations risks. Sterilized QE could force the US curve to flatten even if risk assets stabilise.'

Source: Deutsche Bank

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