As the Federal Reserve is faced with the dilemma of rising prices and more uncertainty, forecasters raised their expectations for a recession. Russia’s invasion of UkraineAccording to the latest CNBC Fed Survey.
In the U.S., the probability of a recession has increased to 33% over the next twelve months. This is ten percentage points more than the February 1 survey. Europeans are at half the risk of falling into recession.
The Fed could decide to raise interest rates quicker because of the increase in commodity prices or lower growth rates by raising rates slower because inflation is higher. Respondents debated this.
Guy LeBas (chief fixed income strategist, Janney Montgomery Scot) stated that “the tax impact of higher commodity prices is more likely to slow the pace for hiking than the inflationary effect is to accelerate it.”
Rob Morgan, Senior Vice President at Mosaic wrote that he expected six quarter-point Fed rate increases in 2022. A CPI of 9% or more in March and April reports could force the Fed to increase its rate by 50basis points in May.
According to 33 survey respondents (including strategists, economists and fund managers), the Fed is expected to raise interest rates by an average of 4.7x this year. This will bring the funds rate at the close of the year to 1.4%, and then to 2% at the close of 2023. Nearly half the respondents predict that the central banks will raise rates between five and seven times in the coming year.
At 2.4% peak funds rate, which is close to the Fed’s normal rate, this rate hike cycle should end. Half of respondents think that the Fed may eventually have to increase rates beyond neutral in order to control inflation.
The rate increase is prompted by forecasts that the consumer price Index will reach a peak of 8.5% in March and gradually fall to a low 5.2% at the end of the year. It’s almost one-fifth of a percentage point higher than February’s survey. CPI is expected to increase by 3.3% in 2023, which is still higher than the Fed’s target.
Peter Boockvar (chief investment officer for Bleakley Advisory Group) wrote, “We may be on the edge of the Fed increasing rates at the time that there is a minus signal in front of GDP.” It’s a terrible position, but they can continue until inflation drops.
Recession does not mean a loss of base
Although a recession may be more likely than February’s, most people don’t believe it is the case. While the GDP projection for 2018 fell by 0.8%, it is still slightly in line with trends at 2.8%. From the previous survey, GDP for 2023 fell by approximately half a percentage point to 2.4%.
While inflation expectations were high this year already, nearly 90% said Russia’s invasion and occupation of Ukraine have exacerbated the situation. They claim that the war has increased their outlook for 2022 inflation. Their inflation forecast was up by an average of 0.8 percent. Respondents said that 60% had reduced their GDP forecasts as a result of conflict. The average is one-half of a point.
The outlook for stocks remains bullish, despite rising inflation and decreasing growth forecasts. Although respondents lowered their expectations for equity, only 53% of them now believe stocks are too overvalued in relation to earnings growth and prospects. This is a decrease of 88% from a year earlier and the lowest bearish responses have been in ages. the Covid pandemic began.
CNBC’s Risk/Reward ratio has improved from -14 to -9. It measures the likelihood of a correction of 10% and the chance that there will be a 10% increase over the next six-months. A negative correction, however, is less probable. Looking ahead, S&P 500Stocks fell to 4,431 in 2013, suggesting that stocks may have an additional 6% upside over the current level.
