Federal Reserve Chairman Jerome Powell is facing significant uncertainty as the market eagerly awaits the outcome of the upcoming Fed meeting. According to a recent CNBC Fed Survey, respondents are predicting a more gradual approach to rate cuts than what is currently priced into the markets. Of the 27 respondents, which include economists, fund managers, and strategists, 84% believe that the Fed will cut rates by a quarter percentage point, while 16% foresee a half-point decrease. This contrasts with the 65% probability of a half-point cut already priced into fed futures markets.
The differences between the survey respondents and the futures markets become more apparent when looking at the long-term forecasts. The survey participants are predicting a year-end funds rate of 4.6% and 3.7% by the end of 2025, compared to 4.1% and 2.8% in the futures market. John Donaldson, director of fixed income at Haverford Trust Co., expressed skepticism about the current market expectations, stating, “We believe that the equivalent of eight cuts in six meetings is more than what will happen. That forecast is more in line with a hard landing than a soft landing.”
Barry Knapp from Ironsides Macroeconomics echoed this sentiment, suggesting that the Federal Open Market Committee (FOMC) may either under-promise or under-deliver, or potentially both. The survey results reflect a division in the markets regarding whether the Fed will opt for a 25 or 50 basis point cut, leading to heightened uncertainty despite the Fed’s usual transparency in telegraphing its moves.
Despite the uncertainty surrounding the Fed’s decision, the majority of survey respondents appear less concerned about the overall state of the economy compared to futures markets. A significant 74% of respondents believe that the September rate cut is timely to facilitate a soft landing, while only 15% consider it to be too late. The probability of a soft landing currently stands at 53%, consistent with levels since March, while the likelihood of a recession has increased to 36%, up five points from its recent low in June but still below the 50% threshold observed in previous years.
Economic growth forecasts remain steady, with a projected growth rate of 2% for this year and a slight dip to 1.7% for 2025, slightly lower than the previous survey forecast. Michael Englund of Action Economics emphasized that the economy is outperforming expectations in 2024, providing the Fed with the opportunity to implement measured rate cuts. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, highlighted the potential for the upcoming rate cuts to resemble a ‘mid-cycle correction’ trend rather than signaling an end-of-cycle recession.
While the majority of respondents are optimistic about the Fed’s ability to navigate a soft landing, there are dissenting voices that urge caution. Diane Swonk, chief economist at KPMG U.S., expressed concerns about Federal Reserve Chairman Powell’s legacy, stating that the window for achieving a soft landing may be narrowing. Neil Dutta of Renaissance Macro Research argued against the notion that a half-point cut would spook the markets, emphasizing the need for decisive action to address potential risks.
When it comes to equity valuations, opinions are divided, with 50% of respondents believing that they are overpriced and 47% suggesting that they are underpriced. However, a staggering 97% of respondents view equity valuations as significantly or somewhat overpriced in the event of a recession. The forecasts for the S&P index indicate a modest decline by year-end, with an average prediction of 5546, just over 1% lower than the current level. Looking ahead to the end of next year, the average forecast places the S&P at 5806, reflecting a modest 3% gain from the current level.
The prevailing sentiment among survey respondents suggests cautious optimism regarding the Fed’s approach to rate cuts and the potential for a soft landing in the economy. Despite differing views on the extent of the rate cuts and their impact on the markets, the overall consensus remains hopeful for a gradual adjustment that will steer the economy towards stability and growth.