US Federal Reserve Chairman Jerome Powell gives a press briefing after the surprise announcement of the Federal Reserve’s interest rate cut on March 3, 2020 in Washington, DC.
Eric Bardat | AFP | Getty Images
It seems that Wall Street is finally embracing the idea that the Fed will raise interest rates into restricted territory and stay at this high rate for a long time. This means that the Fed will rise and hold, not raise and lower as many in the markets expected.
The CNBC Fed’s September poll showed that the average respondent believed the Fed would raise 0.75 percentage points, or 75 basis points, at Wednesday’s meeting, bringing the federal funds rate to 3.1%. The central bank is expected to continue rising until the peak of prices in March 2023 at 4.26%.
The new peak rate forecast represents a roughly 40 basis point increase from the July survey.
Federal Funds Outlook
The pollsters, on average, expected the Fed to remain at that peak rate for nearly 11 months, reflecting a range of views of those who say the Fed will maintain the peak rate for no more than three months and those who say it will stay there for up to to two years.
“The Federal Reserve has finally recognized the gravity of the inflation problem and has turned to sending messages about a positive real policy rate for an extended period of time,” John Riding, chief economic adviser at Brean Capital, wrote in response to the survey.
Ryding sees a potential need for the Fed to rise 5%, from the current range of 2.25%-2.5%.
At the same time, there is growing concern among the 35 respondents, including economists, fund managers and strategists, That the Fed is going to over-tighten it and cause stagnation.
“I’m afraid they’re about to spend with the intensity of their tightening, both in terms of the magnitude of the rallies combined with (quantitative tightening) and the speed with which they are doing it,” said Peter Bokfar, chief investment officer at Bleakley Financial Group in response to the survey.
Boockvar was among those urging the Fed to pivot and tighten policy too soon, a delay that many say has created a need for officials to act quickly now.
The pollsters estimated the probability of a recession in the US over the next 12 months at 52%, unchanged from the July poll. That compares with a probability of 72% for Europe.
In the US, 57% think the Fed will tighten too much and cause a recession, while only 26% said it will tighten enough and only lead to a modest slowdown, a five point drop from July.
Jim Poulsen, chief investment strategist at The Leuthold Group, is among a few optimists.
He says the Fed has a “real chance of a soft landing” because the delayed effects of its tightening thus far will dampen inflation. But this is provided that there is no significant rise.
“All the Fed needs to do to enjoy a soft landing is pull back after raising the money rate to 3.25%, allow real GDP growth to remain positive, and tap all credit as inflation falls while real growth continues,” Paulsen wrote.
But the bigger problem is that most respondents do not see the Fed succeeding in reaching the 2% inflation target for several years.
The pollsters expected the CPI to end the year at 6.8% y/y, down from current level 8.3%decreasing further to 3.6% in 2023.
Only in 2024 did the majority expect the Fed to reach its goal.
Elsewhere in the survey, more than 80% of respondents said they have made no change to their inflation forecasts for this year or next as a result of the Inflation Cut Act.
In the meantime, the stock appears to be in a very tough spot.
Participants identified a lower average forecast for 2022 for the S&P 500 Index for the sixth consecutive survey. They now see the large caps index ending the year at 3,953, or about 1.4% above Monday’s close. The index is expected to rise to 4,310 by the end of 2023.
At the same time, most people believe that market prices are more reasonable than during most of the pandemic.
Nearly half say stock prices are too high compared to earnings and economic forecasts, and half say they are too low or nearly correct.
During the pandemic, at least 70% of survey respondents said stock prices were too high in nearly every survey.
CNBC’s risk/reward ratio – which measures the probability of a rally of 10% minus a downside correction in the next six months – is closer to neutral at -5. It has been from -9 to -14 for most of the past year.
The US economy is expected to run at a stalled speed this year and the next with only 0.5% growth expected in 2022 with a slight improvement expected for 2023 where the average GDP forecast is only 1.1%.
This means that at least two years of growth below trend is the most likely case now.
Mark Zandi, chief economist at Moody’s Analytics, wrote: “There are many possible scenarios for the economic outlook, but under any scenario, the economy will struggle over the next 12-18 months.”
The The unemployment rate is now 3.7It is expected to rise to 4.4% next year. While still low by historical standards, it is rare for the unemployment rate to rise by one percentage point outside of a recession. Most economists said the US is not in a recession right now.
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