Federal Reserve Chairman Powell.
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With considerable uncertainty surrounding what action the Fed will take at this week’s meeting, respondents to a CNBC Fed survey predicted the Fed would take a more gradual approach to rate cuts than currently priced in.
The survey showed that among 27 respondents, including economists, fund managers and strategists, 84% believed that the Federal Reserve would cut interest rates by a quarter of a percentage point, of which 16% believed that the interest rate would be cut by half a percentage point. By comparison, the chance of a rate cut is now priced at 65% Fed futures market.
The difference has grown over time, with survey respondents predicting year-end funds rates of 4.6% and 3.7% by the end of 2025, compared with 4.1% and 2.8% in the futures market.
“We believe eight cuts in six meetings are beyond what is going to happen,” John Donaldson, head of fixed income at Haverford Trust Co., wrote in response to the survey. “This is One prediction is more consistent with the hard prediction.
“We suspect the FOMC is either under-promising or under-delivering, perhaps both,” said Barry Knapp of Ironsides Macroeconomics.
The survey adds to one side of the market debate over the past few days over whether the Fed would cut interest rates by 25 basis points or 50 basis points, creating unusual uncertainty for the central bank as it cuts interest rates almost every day. The measures were communicated at each meeting. (1 basis point equals 0.01%)
Soft landing expected
The main difference may be that compared to the futures market, survey respondents appear to be less worried about the overall economy and more confident that the Fed will have time to gradually cut interest rates. 74% said the September rate cut was to maintain a soft landing, while only 15% said it was too late.
Overall, the probability of a soft landing is 53%, about where it has been since March, while the probability of a recession has risen to 36%, 5 percentage points above the recent low in June but well below At the then 50% level, growth prospects remained at 2% for much of 2022 and 2023, with growth prospects falling to 1.7% in 2025, two-tenths below the July survey but still at or above 2%. Close to potential levels and not in recession.
“With the economy growing faster than expected in 2024, the Fed will have time to cut interest rates at a prudent pace,” said Michael Englund of Action Economics.
“While there are economic risks, the upcoming Fed rate cut will be closer to a ‘mid-cycle correction’ trend, as seen in 1995, 1997 and 2019, rather than an end-of-cycle recession,” Guy wrote. Janney Montgomery Scott, chief fixed income strategist at LeBas.
The unemployment rate forecast did edge slightly higher. Compared with the current unemployment rate of 4.2%, the unemployment rate this year and next year are expected to be 4.4% and 4.5% respectively, both about two-tenths higher than the last survey.
Is it too late?
Not everyone thinks the Fed will have time. Diane Swonk, chief U.S. economist at KPMG, said: “Powell’s legacy depends on him achieving a soft landing by raising rates too late in 2021, and the window for that to happen is now Zoom out. Neil Dutta of Renaissance Macro Research dismissed criticism that a half-basis point cut would scare markets, saying if the Fed only cut rates by a quarter-point, it would There are real risks.
Stock valuations are believed to be broadly in line with expectations for a soft landing, with 50% of respondents saying they are too high and 47% saying they are too low. But 97% of respondents said their pricing was significantly or somewhat too high given the consequences of the recession.
The average forecast has the S&P rising this year, with the index falling to 5,546 by the end of the year, just over 1% below current levels. The average forecast is for the S&P to hit 5,806 by the end of next year, up just 3%.
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