Sunday, May 20, 2007

UBS backs off its bearish interest rate forecast

As of the May 4, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research had been forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. Barely two weeks later in their May 17 report they significantly ratcheted back that outlook and are now forecasting a year-end Fed funds rate of 4.50%, or only three quarter-point cuts. That is a big change, but they did it with little fanfare.

They continue to forecast a Fed funds rate of 3.75% by the end of 2008. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

They did in fact "warn" us that a change was coming, with the May 4 report telling us that "A first rate cut in June seems less likely now" and that "The tentative signs of a growth revival put into question our aggressive Fed call, both in terms of timing and scope." They concluded that "For now, we are waiting for more growth data before reassessing our call." That sounded to me as if their commitment to their "call" was rapidly crumbling and that they themselves are on the verge of admitting that they are clueless. Clueless, yes, but no admission, yet.

-- Jack Krupansky

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