US Federal Reserve Chairman Jerome Powell gives a press briefing in Washington after the surprise announcement that the Fed will cut interest rates on March 3, 2020.
Eric Baradat AFP | Getty Images
Wall Street is finally accepting the idea that the Federal Reserve will raise interest rates into restrictive territory and stay at that high rate for a significant period of time. That is, growth and holding, not growth and decline as the Fed has predicted in many markets.
The September CNBC Fed poll shows the median respondent believes the Fed will raise the federal funds rate by 0.75 percentage points, or 75 basis points, to 3.1% at Wednesday’s meeting. The Central Bank is projected to continue growth until peaking at 4.26% in March 2023.
The new peak rate forecast represents an increase of about 40 basis points from the July survey.
Fed fund expectations
CNBC
On average, respondents predict the Fed will hold its peak rate for about 11 months, with a range of views from those who say the Fed will hold its peak rate for less than three months to those who say it will stay there. two years.
“The Fed has finally recognized the seriousness of the inflation problem and is focused on sending a positive real policy rate message over the longer term,” John Ryding, chief economic adviser at Brean Capital, wrote in response to the survey.
Ryding sees a potential need for the Fed to hike to 5% from its current range of 2.25-2.5%.
At the same time, concern is growing among 35 respondents, including economists, fund managers and strategists. that it will exceed the Fed’s tightening and causes recession.
“I’m afraid they’re on the verge of going overboard with the aggressiveness of their tightening, both in terms of the size (in terms of quantity) and speed of growth,” said Peter Buckvar, chief executive. Bleakley Financial Group’s investment officer wrote in response to an inquiry.
Boockvar was among those urging the Fed to turn around and tighten policy too early, a delay many say has created a need for officials to act quickly now.
Respondents put the probability of a U.S. recession in the next 12 months at 52%, little changed from the July survey. This compares to a 72% probability for Europe.
In the US, 57% believe the Fed will tighten too much and lead to a recession, while only 26% say it will tighten enough to lead to only a modest slowdown, down 5 points from July.
Jim Paulsen, chief investment strategist at The Leuthold Group, is among the few optimists.
He says the Fed has “a real chance of a soft landing” because the lagged effects of tightening so far will dampen inflation. But this is provided that it does not go too far.
“All the Fed has to do to enjoy a soft easing is to back off after raising funds rates to 3.25%, let real GDP growth remain positive, and take all the credit as inflation eases while real growth continues,” Paulsen wrote.
The bigger problem, however, is that most respondents don’t see the Fed being able to hit its 2% inflation target for several years.
Respondents predict that the consumer price index will end the year at a rate of 6.8% year-on-year. current level 8.3%and will decrease to 3.6% in 2023.
Only in 2024 do most predict that the Fed will reach its target.
Elsewhere in the survey, more than 80% of respondents said they had made no changes to their inflation forecasts for this year or next year as a result of the Inflation Reduction Act.
Meanwhile, stocks appear to be in dire straits.
Respondents lowered their average forecast for the S&P 500 for 2022 for the sixth consecutive survey. They now see the large-cap index ending the year at 3,953, or about 1.4% above Monday’s close. The index is expected to rise to 4310 by the end of 2023.
At the same time, most believe the markets are more affordable than they have been for most of the time The covid pandemic.
About half say stock prices are too high relative to the outlook for earnings and the economy, and half say they are too low or about right.
During the pandemic, at least 70% of respondents in almost every survey said stock prices were too high.
The CNBC risk/reward ratio — which measures the likelihood of a 10% upside downside correction in the next six months — is closer to the neutral zone at -5. It has been between -9 and -14 for most of the past year.
The US economy appears to be on pace to stagnate this year and next, with little progress in 2023, with a growth forecast of just 0.5% in 2022 and an average GDP forecast of just 1.1%.
This means that at least two years of downtrend growth is now most likely.
“There are many potential scenarios for the economic outlook, but in any scenario, the economy will struggle over the next 12 to 18 months,” wrote Mark Zandi, chief economist at Moody’s Analytics.
The unemployment rate, now 3.7, looks set to rise to 4.4% next year. While still low by historical standards, it is rare for the unemployment rate to rise 1 percentage point outside of a recession. Most economists said the US is not in recession now.
