Markets agree with Fed policy hike in the long term, according to CNBC poll

While respondents to the CNBC Fed poll do not expect any additional interest rate increases by the Fed, they have fully embraced the “higher for longer” mantra to the point that no rate cuts are expected until the third quarter of 2024.

31 respondents, including economists, strategists and analysts, believe the Fed is now on hold until September next year, with 57% expecting to cut interest rates. Last summer, survey respondents expected interest rate cuts at the beginning of next year.

“I think (Fed Chairman Jerome) Powell and Co. can now be patient and sit back and see how all the tightening that has already happened in the short term and more recently in the long term plays out,” Chief Investment Officer Peter Boockvar said. Bleakley Financial Group wrote in response to the survey. “And it will continue to do so as rising interest rates continue to pressure more and more families.”

The change can also be seen in the outlook for the federal funds rate, the central bank’s benchmark for short-term lending costs.

The average is now expected to end 2024 at 4.6%, assuming about 75 basis points of interest rate cuts. In June, the funds rate at the end of 2024 was expected to reach 3.8%, which assumes cuts of 125 basis points. A basis point equals 0.01%.

A more hawkish Fed outlook comes with roughly equal odds of a recession and a soft landing.

Respondents on average see a 49% probability of a recession in the next 12 months and a 42% probability of a soft landing. While they raised their GDP forecast for 2023 from less than 1% in June to 2.4% now, they almost halved their growth forecast for 2024 to 0.73%.

“The Fed is too focused on a soft landing, and has taken its inflation target too far on the high end,” wrote Robert Brusca, chief economist at Fact & Opinion Economics. The Fed is calling for more effort now to reduce inflation and rising unemployment.

The CPI, currently at 3.7% on an annual basis, is expected to fall to 2.9% next year and about 2.6% in 2025, which means the Fed will not reach its 2% target for several years, until… Taking into account inflation. The Consumer Price Index (CPI) exceeds the Fed’s preferred personal consumption expenditures inflation index.

About 60% of respondents believe the Fed will reach its inflation target in 2025 or sometime after that, while 19% do not think the Fed will get there at all. The unemployment rate is expected to rise from the current level of 3.8% to 4.5% next year.

Troy Ludtka, chief U.S. economist at SMBC Nikko Securities Americas, said that higher Treasury yields and rising global tensions “increase the likelihood of an inflationary outcome. … We are paying close attention to the recent rise in delinquencies on credit cards and auto loans. In this fields.” “Consumers seem to have gone too far.”

But some are more optimistic.

“What is a recession? The economy continues to show extraordinary resilience,” asks Mark Zandi, chief economist at Moody’s Analytics. “Consumers are doing their part, businesses are holding strong, and infrastructure and the CHIPS Act are providing tailwinds.”

At the same time, higher bond yields and rising deficits have emerged as areas of concern: 77% say a 10-year bond yield of 5% would make the Fed less likely to raise interest rates, and 87% say higher interest rates have a “somewhat negative impact what”. ‘Impact’ on employment and business spending 73% say higher rates have a somewhat negative impact on consumer spending.

All respondents say they are concerned about the growth rate of the federal deficit, while 87% are concerned about the size of the debt.

But respondents disagree on how to address the problem.

A majority of 45% say the government should increase revenues and reduce spending, while 42% call for only cutting spending. Respondents put a 39% chance of a government shutdown, while 61% say it would be “somewhat negative” for the economy.

Don’t miss these CNBC PRO stories: