NEW YORK (TheStreet) -- While most of Wall Street is slashing growth forecasts, Federal Reserve bank presidents continue to believe the economic picture is quite rosy. Several major investment banks have dropped their forecasts, citing problems in Europe and lackluster economic data.

But the Federal Reserve is insisting that things aren't so bad, with hugely optimistic growth forecasts with little to back up those projections. It seems as if the investment banks are facing reality while the Fed remains in fantasy land. Keep in mind that in retail August sales commentary from earnings announcements so far --


company has guided for a deceleration in August from July. August is more important because it is the kickoff to back-to-school season.

The Fed has already lost all credibility on its assessment of inflation. Chairman Ben Bernanke insisted that there was no inflation problem for months, while the statistics said otherwise. Then in his last FOMC statement he says inflation picked up, but has moderated.

As RDQ Economist John Ryding said, "There is no evidence in the first of the July inflation reports to support the Fed's statement last week that, "More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks."

Import prices are rising at the fastest pace in about three years (with or without imported energy prices). So we know the Fed is wrong on inflation, just how out of touch are the presidents with their growth forecasts? Let's compare Fed presidents' forecasts with investment banks. You decide.

John C. Williams, president of the San Francisco Fed, said in a speech in Salt Lake City on July 28, "I expect real GDP will grow at a pace a bit faster than 3% in the second half of this year and in 2012."

He also said that the financial sector's health was improving, but apparently he didn't take into account all the jobs this group has been killing.

Joachim Fels, who co-heads

Morgan Stanley's

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global economics team, said in a research note on Wednesday: "Our revised forecasts show the US and the euro area hovering dangerously close to a recession -- defined as two consecutive quarters of contraction -- over the next 6-12 months." Morgan's U.S. growth forecast? 2.5%


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cut its 2011 forecast to 1.6% from 1.7% and lowered its projection for 2012 to 2.1% from 2.7%. Citigroup economists Steven Wieting and Shawn Snyder wrote that they were lowering their forecasts because of potential "political paralysis" in the U.S. and fiscal tightening steps.

Federal Reserve Bank of Cleveland President Sandra Pianalto said in a speech in Columbus: "My latest forecast is for the economy to grow at a rate of about 2% this year, and about 3% in each of the next two years," she said. "Our economy has to grow at about a 2.5% clip just to absorb new labor force entrants and to keep the unemployment rate from rising."

Keep in mind that the first quarter was revised down to 0.4% and second quarter was only 1.3%. Where is she getting 2%?

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Chicago Fed President Charles Evans is actually cutting his growth forecasts for 2011 and 2012, but don't get too excited just yet because the numbers are still so inflated it invokes visions of fantasyland. In an interview with

The Wall Street Journal

, Evans said he now expects the economy to grow by 3% to 3.25% in 2011 and 3.5% and 3.75% in 2012, compared to the 4% growth rate he was expecting before a recent string of disappointing economic data.

JPMorgan Chase

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slashed its gross domestic product forecast from 2.5% to 1% for the fourth quarter and from 1.5% to 0.5% in the first quarter of 2012.

--Written by Debra Borchardt in New York


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