US Federal Reserve Chairman Jerome Powell gives a press conference after the surprise announcement that the FED will cut interest rates on March 3, 2020 in Washington, DC.
Eric Baradat | AFP | Good pictures
Wall Street seems to be accepting the idea that the Federal Reserve will finally raise rates within the control range and stay at that high rate for a significant period of time. That means the Fed will hike and hold, not hike and cut, as many in the markets predicted.
A September CNBC Fed survey showed the average respondent believed the central bank would raise the Fed by 0.75 percentage point, or 75 basis points, at Wednesday’s meeting, bringing the federal funds rate to 3.1%. The central bank is forecast to continue raising interest rates until March 2023, when they rise to 4.26%.
The new peak rate forecast represents a nearly 40 basis point increase from the July survey.
Fed Funding Expectations
On average, respondents predicted the Fed would stay at that peak rate for nearly 11 months, reflecting the view of those who say the Fed will hold its peak rate for up to three months. for two years.
“The Fed is finally realizing the severity of the inflation problem and has moved to announce a positive real policy rate for a longer period of time,” John Riding, chief economic adviser at Brean Capital, said in a poll.
Riding sees the possibility of a hike to 5% from the central bank’s current range of 2.25%-2.5%.
At the same time, concern is growing among 35 respondents, including economists, fund managers and strategists. The central bank will increase its tightening and cause stagnation.
“I fear they will go too far with the aggressiveness of their tightening, both in the size of the hikes (quantity tightening) and the speed at which they do it,” Peter Bookwar, chief investment officer at Bleakley Financial Group, wrote in response to the survey.
Bookwar was among those urging the Fed to take the lead early and tighten policy, which many say has created a need for officials to move quickly now.
Respondents said the probability of a recession in the U.S. in the next 12 months was 52%, little changed from the July survey. This compares with a 72% probability for Europe.
In the US, 57% believe the Fed will tighten too much and cause a recession, while 26% say it will tighten enough and cause only a moderate recession, a 5-point drop from July.
Jim Paulsen, chief investment strategist at The Luthold Group, is one of the few optimists.
He says the central bank “has a real chance of a soft landing” because the lagged effects of its tightening to date will reduce inflation. But provided that it does not rise very far.
“All the Fed needs to do to enjoy a soft landing is to hold off after raising the funds rate to 3.25%, allow real GDP growth to remain positive and take all the credit as inflation slows as real growth continues,” Paulson wrote.
The biggest problem, however, is that most respondents believe the Fed has not succeeded in meeting its 2% inflation target for several years.
The Consumer Price Index is forecast to decline at a 6.8% year-on-year rate. The current level is 8.3%.and will fall to 3.6% in 2023.
Only in 2024 is the majority of people predicting that the central bank will reach its target.
Elsewhere in the survey, more than 80% said they were making no changes to their inflation forecasts for this year or next year as a result of the deflationary legislation.
Meanwhile, stocks seem to be in a tough spot.
Respondents to the sixth consecutive survey for the S&P 500 lowered their median outlook for 2022. They now see the large-cap index closing at 3,953, or 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 that the price is fairer than it has been in most markets The covid pandemic.
Half say stock prices are too high relative to earnings and the economy, and half say they’re 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 probability of a 10% reversal minus a correction in the next six months — is near the neutral zone at -5. For most of last year it was between -9 and -14.
The US economy is running at a stagnant pace this year and next, with growth forecast at just 0.5% in 2022 and an average GDP forecast of just 1.1% in 2023.
That means at least two years of lower trend growth is now the most likely case.
Mark Jandy, chief economist at Moody’s Analytics, wrote, “There are several possible scenarios for the economic outlook, but under any scenario the economy will struggle over the next 12-18 months.”
The The unemployment rate now stands at 3.7, rising to 4.4% next year. Although still low by historical standards, the unemployment rate rarely rises above 1 percent outside of a recession. Most economists say the US is no longer in a recession.
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