Eric Baradat | AFP | Getty Images Wall Street finally seems to be buying into the idea that the Federal Reserve will raise interest rates into restrictive territory and stay at that high rate for a significant period. That is, the Fed will hike and hold, not hike and cut as many in the markets had predicted. The September CNBC Fed survey shows the average respondent thinks the Fed will raise 0.75 percentage points, or 75 basis points, at Wednesday’s meeting, taking the federal funds rate to 3.1%. The central bank is forecast to continue hiking until the rate peaks in March 2023 at 4.26%. The new peak interest rate forecast represents an increase of nearly 40 basis points from the July survey. Zoom Icon Arrows pointing out Fed funds expectations CNBC Respondents on average predicted the Fed would keep interest rates at that peak for nearly 11 months, reflecting a range of views from those who say the Fed will keep interest rates at its peak for just three months to those who say it will keep it there for up to two years. “The Fed has finally realized the severity of the inflation problem and has turned to messaging for a positive real policy rate for an extended period of time,” wrote John Ryding, chief economic adviser at Brean Capital, in response to the survey. Ryding sees the Fed likely needing to hike as much as 5%, from the current range of 2.25%-2.5%. At the same time, there is growing concern among the 35 respondents, including economists, fund managers and strategists, that the Fed will overtighten and trigger a recession. “I’m afraid they’re on the verge of going overboard with the aggressiveness of their tightening, both in terms of the size of the increases along with (quantitative tightening) and the speed at which they’re doing it,” said Peter Boockvar, head. Bleakley Financial Group chief investment officer wrote in response to the survey. Boockvar was among those who had urged the Fed to pivot and tighten policy too soon, a delay that many say has created the need for officials to move quickly now. Respondents put the likelihood of a US recession in the next 12 months at 52%, little changed from the July survey. This compares with a 72% chance for Europe. In the US, 57% think the Fed will tighten too much and cause a recession, while just 26% say it will tighten enough and cause only a modest slowdown, down five points from July. Jim Paulsen, chief investment strategist at The Leuthold Group, is among the few optimists. He says the Fed “has a real opportunity for a soft landing” because the lagged effects of its tightening to date will reduce inflation. But that’s provided it doesn’t go too far. “All the Fed needs to do to enjoy a soft landing is to step back after raising the funds rate to 3.25%, let real GDP growth remain positive and take all the credit as inflation falls while real growth persists,” Paulsen wrote. The bigger problem, however, is that most respondents don’t see the Fed hitting its 2% inflation target for several years. Respondents predicted that the consumer price index would end the year at an annual rate of 6.8%, from the current level of 8.3%, and decline further to 3.6% in 2023. It is not until 2024 that most predict the Fed will achieve its goal. Zoom Icon Arrows pointing out Elsewhere in the survey, more than 80% of respondents said they had made no change to their inflation forecasts for this year or next year as a result of the CCA. In the meantime, stocks appear to be in a very difficult position. Respondents downgraded their average 2022 outlook for the S&P 500 for the sixth straight 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 4,310 by the end of 2023. At the same time, most believe markets are more reasonably priced than they were during most of the 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 said stock prices were too high in almost every survey. The CNBC risk/reward ratio — which measures the probability of a 10% upside minus downside correction over the next six months — is closer to the neutral zone at -5. It was -9 to -14 most of last year. The US economy appears to be running on steam this year and next with growth forecast at just 0.5% in 2022 and little improvement expected for 2023, where the average forecast for GDP is just 1.1%. Zoom Icon Arrows pointing out This means that at least two years of below-trend growth is now the most likely scenario. Mark Zandi, chief economist at Moody’s Analytics wrote: “There are many possible scenarios for the economic outlook, but under any scenario the economy will struggle over the next 12-18 months.” The unemployment rate, now at 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 by 1 percentage point outside of a recession. Most economists said the US is not in a recession now.
