Federal Reserve Chairman Jerome Powell delivers a news conference after the surprise announcement that the Fed will cut interest rates on March 3, 2020 in Washington, DC.
Eric Baradat | AFP | Getty Images
Wall Street finally appears to have embraced the idea that the Fed will raise rates into restrictive territory and hold them there for quite some time. That is, the Fed will raise rates and keep them on hold, rather than raising and lowering rates as many in the market had predicted.
The September CNBC Fed survey showed that the average respondents thought the Fed would raise rates by 0.75 percentage points, or 75 basis points, at its meeting on Wednesday, bringing the federal funds rate to 3.1 percent. The central bank is expected to keep raising interest rates until they peak at 4.26% in March 2023.
The new peak rate forecast is an increase of nearly 40 basis points from the July survey.
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Respondents, on average, predict the Fed will stay at this peak rate for nearly 11 months, reflecting the range from those who believe the Fed will maintain its peak rate for at least three months to those who believe it will remain there for as long as 3 months. A series of views of people of the month. two years.
“The Fed is finally waking up to the seriousness of the inflation problem and has turned to delivering positive real policy rates for an extended period of time,” John Ryding, chief economic adviser at Brean Capital, wrote in response to the survey.
Ryding believes the Fed may need to raise rates by 5% from the current range of 2.25%-2.5%.
Meanwhile, 35 respondents, including economists, fund managers and strategists, are increasingly concerned that the Fed will over-tighten and lead to a recession.
“I am concerned that they are tightening too much, both in terms of the size of the rate hikes and (quantitative tightening) and the speed at which they are doing it,” Chief Executive Peter Boockvar said. . An investment officer at Bleakley Financial Group wrote in response to the inquiry.
Boockvar was among those early on urging the Fed to adjust and tighten policy, a delay that many say has led officials to act quickly now.
Respondents see a 52 percent chance of a U.S. recession in the next 12 months, little changed from the July survey. This compares to a 72 percent chance in Europe.
In the U.S., 57% believe the Fed will tighten excessively and lead to a recession, while only 26% believe the Fed will tighten just enough, resulting in only a modest slowdown, down 5 percentage points from July.
Jim Paulsen, chief investment strategist at The Leuthold Group, is one of the few optimists.
He said the Fed has “a real chance for a soft landing” as the lagged effects of its tightening policy so far will reduce inflation. But only if it doesn’t go too far.
“For the Fed to achieve a soft landing, it only needs to exit after raising the funds rate to 3.25%, keep real GDP growth positive, and take on all credit if inflation falls and real growth persists,” Paulson wrote.
The bigger problem, however, is that most respondents believe the Fed has been unable to successfully achieve its 2% inflation target for several years.
Respondents predict that the consumer price index will increase by 6.8% year-on-year by the end of this year, down from the current 8.3%, and decline further to 3.6% in 2023.
Only in 2024 do most predict the Fed will hit its target.
Elsewhere in the survey, more than 80% of respondents said their inflation forecasts for this year or next have not changed as a result of the Inflation Reduction Act.
Meanwhile, stocks appear to be in a very difficult position.
Respondents lowered their average 2022 forecast for the S&P 500 for the sixth time in a row. They now see the large-cap index end the year at 3,953, 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 believe the market is priced more reasonably than it was during the pandemic.
About half said the stock price was too high relative to earnings and the economic outlook, and half said it was too low or just right.
During the pandemic, at least 70% of respondents to nearly every survey said stock prices were too high.
CNBC’s risk/reward ratio — a measure of the probability of a 10% upside minus a downside correction over the next six months — is near the neutral zone of -5. It has been -9 to -14 for most of the past year.
The U.S. economy is expected to stagnate this year and next, with growth expected to be just 0.5% in 2022, little improvement is expected in 2023, and the average GDP forecast is just 1.1%.
That means below-trend growth for at least two years is now most likely.
“There are many potential scenarios for the economic outlook, but in any case, the economy will struggle over the next 12-18 months,” wrote Mark Zandi, chief economist at Moody’s Analytics.
The unemployment rate is currently at 3.7 and 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 1 percentage point outside of a recession. Most economists say the U.S. is not in a recession right now.