With considerable uncertainty surrounding the Federal Reserve's upcoming meeting, the CNBC Fed Survey indicates a more cautious approach to rate cuts than currently reflected in market expectations.
According to the survey, 84% of the 27 respondents, including economists, fund managers, and strategists, anticipate a 25 basis point reduction in interest rates, while 16% predict a 50 basis point cut. This contrasts with the futures markets, which currently price in a 65% chance of a half-point cut.
Survey respondents forecast a year-end federal funds rate of 4.6% and 3.7% by the end of 2025, compared to the futures market’s predictions of 4.1% and 2.8% respectively.
John Donaldson, Director of Fixed Income at Haverford Trust Co., noted, “We believe that the equivalent of eight cuts in six meetings is more than what will actually happen. That forecast aligns more with a hard landing than a soft landing.” Barry Knapp from Ironsides Macroeconomics added, “We suspect the FOMC will either under-promise or under-deliver, perhaps both.”
The survey reflects a divergence in views on the Fed’s next move, with uncertainty unusually high given the Fed’s typical clarity. (Note: One basis point equals 0.01%.)
Soft Landing Anticipated
The survey respondents appear less concerned about the broader economy than futures markets, and more optimistic about the Fed’s ability to implement gradual rate cuts. Seventy-four percent believe that a rate cut in September will help achieve a soft landing, while only 15% think it might be too late.
The probability of a soft landing is currently at 53%, maintaining a level similar to March, while the likelihood of a recession has increased slightly to 36%, up 5 points from June but still lower than the 50% rate seen throughout much of 2022 and 2023. Economic growth is projected to be around 2% for this year, with a slight decrease to 1.7% for 2025, indicating growth close to economic potential rather than a recession.
Michael Englund of Action Economics commented, “The economy is growing faster than expected in 2024, and the Fed has time to lower rates at a measured pace.” Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, described the anticipated cuts as a “mid-cycle correction” similar to those in 1995, 1997, and 2019, rather than a sign of an end-of-cycle recession.
Unemployment and Equity Valuations
Unemployment forecasts have edged slightly higher, with predictions of 4.4% for this year and 4.5% for next year, compared to the current rate of 4.2%.
Despite some concerns, most view equity valuations as aligned with a soft landing scenario, with 50% of respondents saying stocks are overpriced and 47% saying they are underpriced. However, 97% believe equities are overpriced for a recessionary outcome.
The S&P 500 is expected to end the year at around 5,546, slightly below the current level, with a forecast of 5,806 by the end of next year, indicating a modest gain.
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