US Markets
Tuesday, October 31st, 2023 1:51 pm EDT
Key Points
- Change in Fed Expectations: Respondents to the CNBC Fed Survey no longer anticipate further rate hikes by the Federal Reserve and have embraced the idea of a “higher-for-longer” interest rate environment. They do not expect any rate cuts until the third quarter of 2024, a significant shift from earlier predictions of rate cuts in the beginning of the next year.
- Outlook for the Fed Funds Rate: The survey indicates a change in the outlook for the fed funds rate, which is the central bank’s benchmark for short-term lending costs. The average forecast now suggests that the rate will end 2024 at 4.6%, assuming a rate cut of about 75 basis points. In June, the forecast for the year-end 2024 funds rate was 3.8%, assuming a larger 125 basis points of cuts.
- Economic Concerns and Differing Views: Respondents express concerns about a potential recession and a soft landing, with a roughly equal probability for both outcomes. While they have raised their 2023 GDP forecast, they have significantly reduced their growth outlook for 2024. There are differing opinions on the Fed’s focus on a soft landing and inflation targets. Additionally, high bond yields, growing deficits, and concerns about the federal deficit and debt are highlighted. Respondents have varying views on how to address these concerns, with some advocating both revenue increases and spending cuts and others advocating only spending cuts. A government shutdown is considered likely by respondents, with many believing it would have a somewhat negative impact on the economy.
The CNBC Fed Survey reveals a shift in expectations regarding Federal Reserve actions and the economic outlook. Respondents, including economists, strategists, and analysts, now anticipate no further rate hikes from the Fed, aligning with the central bank’s “higher-for-longer” stance. In contrast, they do not foresee any rate cuts until the third quarter of 2024, marking a significant change from earlier predictions of rate cuts in the beginning of the following year.
The outlook for the federal funds rate, which serves as the benchmark for short-term lending costs, has also evolved. It is now expected to end 2024 at 4.6%, assuming a rate cut of approximately 75 basis points. This marks a shift from June when the year-end 2024 funds rate was forecast at 3.8%, assuming a larger 125 basis points of cuts.
Respondents express near-equal probabilities for a recession and a soft landing in the near future. They predict a 49% probability of a recession within the next 12 months and a 42% probability of a soft landing. While the GDP forecast for 2023 has been revised upward from under 1% to 2.4%, the outlook for 2024 has been lowered by nearly half to 0.73%.
Some experts believe that the Fed should take more decisive action to address inflation and unemployment, emphasizing that the central bank seems overly focused on achieving a soft landing.
Despite the consumer price index running at 3.7% year over year, it is expected to decrease to 2.9% next year and around 2.6% in 2025, indicating that the Fed may not reach its 2% inflation target for several years.
Concerns are also raised about high Treasury yields, rising global tensions, credit card and auto loan delinquencies, and the impact of high bond yields and growing deficits on business and consumer spending.
A majority of respondents are worried about the growth rate of the federal deficit and the size of the debt. Opinions vary on how to address these concerns, with some advocating both revenue increases and spending cuts and others advocating only spending cuts.
Finally, respondents express apprehension about a government shutdown, with 61% believing it would have a somewhat negative impact on the economy.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/10/31/markets-are-on-board-with-the-feds-higher-for-longer-policy-cnbc-survey-shows.html
