Federal Reserve Chairman Jerome Powell.
Andrew Harnik | Getty Images
With significant uncertainty surrounding the Federal Reserve’s decisions in its upcoming meeting, respondents to the CNBC Fed Survey anticipate a more measured approach to rate cuts than what markets currently reflect.
The survey reveals that 84% of the 27 respondents, which include economists, fund managers, and strategists, predict a quarter percentage point cut by the Fed, while 16% foresee a half-point decrease. This contrasts with the 65% probability of a half-point cut priced into the fed futures markets.
As time progresses, the survey respondents’ forecasts indicate a funds rate of 4.6% by the end of this year 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., stated, “We believe that the equivalent of eight cuts in six meetings is more than what will happen. That forecast is more aligned 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 highlights the debate within the market regarding whether the Fed will cut rates by 25 or 50 basis points, creating an unusual amount of uncertainty given the Fed’s typically well-signaled actions. One basis point equals 0.01%.
Soft landing expected
Survey respondents appear less concerned about the overall economy compared to futures markets and more confident that the Fed has time for gradual rate cuts. Seventy-four percent believe the September rate cut will be timely enough to maintain a soft landing, while only 15% think it’s too late.
The probability of a soft landing is at 53%, consistent since March, with the likelihood of a recession rising to 36%, five points above its recent low in June but significantly below the 50% level seen for much of 2022 and 2023. Economic growth is forecasted at 2% for this year, decreasing slightly to 1.7% for 2025, still around potential levels and not indicative of a recession.
Michael Englund of Action Economics remarked, “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, noted, “The upcoming Fed cuts will be more akin to a ‘mid-cycle correction,’ similar to trends seen in 1995, 1997, and 2019, rather than an end-of-cycle recessionary trend.”
Unemployment rate forecasts have marginally increased. The current rate of 4.2% is expected to rise to 4.4% and 4.5% for this year and next, respectively, both slightly above previous survey figures.
Too late?
Not all respondents believe the Fed has ample time. Diane Swonk, chief economist at KPMG U.S., stated, “Powell’s legacy is dependent on him achieving a soft landing after delaying rate hikes in 2021. The window for this is narrowing.” Neil Dutta of Renaissance Macro Research dismisses the concern that a half-point cut would unsettle markets, indicating potential risks if the Fed opts for only a quarter-point reduction.
Equity valuations are perceived to be mostly aligned with a soft landing scenario, with 50% considering them overpriced and 47% underpriced. However, 97% assert that they are significantly or somewhat overpriced for a recessionary outcome.
The S&P 500 is projected to experience modest gains for the year, with the index expected to fall to 5546 by year-end, slightly over 1% below the current level. By the end of next year, the S&P is forecasted to reach 5806, representing a 3% increase from the present valuation.
