The CNBC Fed Survey shows market expectations have turned aggressive for Federal Reserve policy tightening this year and next, with respondents looking for multiple rate hikes and significant balance sheet reduction.
According to the December survey, the March rate increase is expected. Respondents anticipate 3.5 rate rises in 2019, which is a consensus of three, but debate remains over whether there should be a fourth. The majority of respondents expect two to three rate hikes in the coming year. Half see at least four, while half anticipate five or six.
Three more hikes will be made next year. The forecast is for a funds rates of slightly over 1% next year. This compares to 0.8% now and 1.8% 2023. A terminal rate (or the end of the hiking cycle) of 2.4% was reached in March 2024.
Diane Swonk of Grant Thornton was the chief economist and wrote, “The Fed pivoted from patient-to panicked on inflation in record time.” This increases the chance of policy mistakes, particularly given the complex nature of today’s inflation dynamics.
Two-day central bank meeting concludes Wednesday. It is expected that it will give further clues about when and how it will increase rates. Jerome Powell, Chairman of the central bank will address media.
It is evident that the balance sheet runoff began in July. This contrasts with the November survey’s beginning. The Fed still has not created a plan to balance the sheet runoff. Here is an overview of what people think.
- To reach the $9 Trillion balance sheet in 2019, $380 billion will be needed and $860 billion by 2023.
- The Fed will gradually increase the monthly runoff rate to $73 billion, which is much faster than 2018’s.
- $2.8 trillion total runoff, or approximately a third the balance sheet for 3 years.
Many support the Fed cutting the Treasury’s mortgage portfolio first, so that short-term Treasurys can runoff prior to long-term Treasurys. The balance sheet will be reduced by not replacing older securities.
Chad Morganlander from Stifel Nicolaus, portfolio manager said that “investors underestimate the risks in the financial sector.” Markets have been affected by liquidity waves and the Zero-Interest Policy. Federal Reserve policy should have been changed a year earlier.
91% believe the Fed is late to address inflation.
Joel L. Naroff (president, Naroff Economics LLC) responded to the survey by saying that “the Fed should begin raising rates aggressively” which is 50 bps at first. This will allow it to throttle back later if/when supply chain problems start to resolve themselves.
The respondents lowered their stock outlook but not by much compared with how they raised their expectations for Fed rate increases. This is the The S&P 500Ending the year, the stock market is at 4,658, which represents a 5.6% gain over Monday close. This is down from December’s forecast of 4752. The S&P is forecast to rise to 4889 in 2023.
CNBC Risk/Reward ratio, which measures how likely it is for stocks to decline or increase by 10% in six months from the last survey, has fallen to -14, down from -11. The probability of seeing a 10% drop in stock prices over the next six-months is 52%, while it’s only 38% that there will be a gain of 10%.
The economic forecasts of respondents have fallen due to the Omicron wave and a rise in Fed tightening expectations. For this year’s GDP, it fell to 3.5%, from 3.9% in December and 2.7% from 2023. It was 2.9% down from 2.9%. CPI was forecast to rise by 0.4 percent this year, to 4.4% and 3.2% next years.
This year’s unemployment rate will be 3.6%, down from 3.9% currently. While the probability of experiencing a recession within the next year has increased from 19% to 23%, this is still a fairly average rate. To slow down the economy, 51% think inflation is the greatest threat to its expansion.
Mark Zandi (chief economist at Moody’s Analytics) stated that if the pandemic does not recede, each wave of the virus will become less disruptive. “The economy will have full employment by next year and inflation close to the Fed’s target,” he said.
A previous version of this article reported that the GDP predictions for 2022 & 2023 had increased due to an error made in a survey response. These declined from 3.9% to 3.5% in December 2023’s survey to 2023 to 2.7% to 2.9% to 2023.