>What is Goldman trying to accomplish? Are you assuming that they
>are signalling their preferences to the Fed on monetary policy? Or
>are they simply warning their clients to expect higher short-term
>rates, with rising labor costs as the reason? In other words, are
>they practising normative or positive economics? I don't fully
>understand the feedback mechanism among the Fed and market players.
I think Goldman is doing both - the body of the report, for which that was a teaser, was worried about rising inflationary pressures. But they're also warning that the tightening might be longer and harder than the consensus expects. This is a switch for them - they'd been fairly bearish on the economy and dovish on inflation (birds everywhere!) until recently.
The feedback is very complicated. In February, Greenspan declared the failre of long-term rates to rise along with short-term rates to be a "conundrum," which the market took as a sell signal. So long rates rose for a bit - but now they're practically back where they started <http://finance.yahoo.com/q/bc?s=%5ETNX&t=6m>. He wanted higher long rates, because without them, the Fed's tightening actions were being diluted. That's part of the reason the tightening may have to be longer & harder than markets expect now. Back in the mid-90s, the markets wanted the Fed to tighten harder than it did, but Greenspan was reportedly worried about deflation, so they held off - and it's a good thing, because the Asian crisis probably would have been far worse if they had tightened.
Doug