Fed to cut rates by a quarter point with a soft landing expected, according to CNBC Fed Survey

US Markets
Tuesday, September 17th, 2024 3:18 pm EDT

The CNBC Fed Survey highlights the uncertainty surrounding the Federal Reserve’s upcoming meeting, with a divided outlook on the extent of the rate cut. While 84% of respondents—comprising economists, fund managers, and strategists—expect the Fed to cut interest rates by a quarter-point, only 16% foresee a half-point cut. This is in contrast to futures markets, which are pricing in a 65% chance of a larger half-point cut. Over the longer term, survey respondents forecast a more gradual reduction in rates, predicting a year-end funds rate of 4.6% and 3.7% by the end of 2025, compared to the more aggressive forecasts of 4.1% and 2.8% in the futures markets.

This divergence reflects a broader debate about the future direction of the U.S. economy. Many respondents believe that a slower pace of rate cuts aligns with a “soft landing” scenario, where the economy avoids a severe recession. In fact, 74% of those surveyed believe the anticipated September rate cut will come just in time to preserve this soft landing, with only 15% fearing it is too late. The probability of a soft landing remains at 53%, while the chance of a recession has slightly increased to 36%, up from 31% in June. Despite this uptick in recession fears, it remains well below the 50% level observed during much of 2022 and 2023. Economic growth is still expected to hit 2% in 2024 and 1.7% in 2025, figures that suggest the economy is performing close to its potential without tipping into a downturn.

Some experts remain concerned that the Fed may miss the window for a soft landing. Diane Swonk of KPMG U.S. warns that Federal Reserve Chair Jerome Powell’s legacy hinges on managing this delicate balancing act after delaying rate hikes in 2021. Others, like Neil Dutta of Renaissance Macro Research, argue that a mere quarter-point cut may not be enough, with real risks if the Fed does not take more aggressive action. On the other hand, John Donaldson from Haverford Trust Co. feels that the market’s current expectation of “eight cuts in six meetings” is overly aggressive and more indicative of a hard landing.

Equity market valuations also reflect this uncertainty. While 50% of respondents believe the market is overpriced for a soft landing, 97% think it is significantly overpriced in the event of a recession. The S&P 500, which has posted strong gains in 2024, is expected to slightly retreat by the end of the year to 5,546, a small dip of just over 1%. By the end of 2025, the average forecast predicts the S&P 500 will rise modestly to 5,806, representing only a 3% increase from current levels.

In summary, the Fed Survey underscores the ongoing uncertainty in the market regarding the Fed’s rate decisions and the broader economic outlook. While most respondents expect a gradual approach to rate cuts, there is a divide between those anticipating a soft landing and those warning of potential risks if the Fed moves too slowly. The survey also reveals cautious optimism for continued moderate economic growth, with concerns about inflation and unemployment persisting but not overwhelming expectations for a manageable economic environment moving forward.

For the full original article on CNBC, please click here: https://www.cnbc.com/2024/09/17/fed-to-cut-rates-by-a-quarter-point-with-a-soft-landing-expected-according-to-cnbc-fed-survey.html