Fed likely to wait until November for cut announcement, CNBC poll finds

The announcement of the reduction is coming, but not this week, according to the CNBC Fed Survey.

The survey of 32 market participants shows that they expect the Federal Reserve to announce a cut from its $ 120 billion monthly asset purchases in November and start to decline in December. The Fed is expected to cut its purchases each month by $ 15 billion.

The first rate hike will only come at the end of next year.

“The challenge for policymakers will continue to separate the timing of the cut from the timing of a possible rate take-off amid divergences within the FOMC,” said Kathy Bostjancic, chief US financial markets economist at Oxford Economics.

In early August, just before the spread of the Delta variant became a concern, many predicted that the announcement would come at this meeting. Now, only the right respondents believe it will happen tomorrow, compared to 17 who expected an announcement in November.

Among the minority, many believe that the Fed is taking risks with inflation.

“Fed easing risks resulting in an inflation rate above 2% which would be costly to reverse while providing no job creation benefits,” said John Ryding, chief economic adviser at Brean Capital. “The Fed is falling further behind and could make a major policy mistake right now.”

Amid these worries, the market still does not expect any rate hikes until the end of 2022. In fact, expectations for rate hikes have actually eased since the more optimistic days of spring, when the reopening took place. is accelerated.

In April, the survey showed expectations for nearly two quarter-point rate hikes next year. Now only one is fully priced.

This could be because respondents lowered their growth forecast for the year largely due to the spread of the Delta variant.

Growth is now forecast at 5.7% for 2021, down almost a percentage point from the July survey. Respondents said they reduced their GDP outlook by 0.65 percentage points due to the economic effects of the delta variant.

The effects raised the outlook for the unemployment rate by less than a tenth of a percentage point for this year, but the forecast remains for a decline to 4.8% from the current level of 5.2%, and for a further drop to around 4% next year. .

“No more need for crutches,” said Thomas Costerg, senior US economist at Pictet Wealth Management. “The American consumer is doing well and will continue to do well.”

Some of the lost growth is recovered next year, with the 2022 GDP forecast now set at 3.7%, down from 3.4% in the July forecast. Most still view inflation as temporary, but still believe the Fed should cut back on asset purchases to deal with the threat. The consumer price index is expected to rise nearly 4.4% this year before the rate drops to 3% next year.

“The appropriate question is whether inflation can be brought down to the Fed’s 2% target without a recession. I don’t think it does,” said Robert Fry of Robert Fry Economics.

Respondents to the CNBC survey, as a rule, think the stock market is overvalued at all times.

This is the case in this survey with 56% of them stating that the market is overvalued in relation to their prospects for profits and economic growth. But this is the lowest percentage since the start of the pandemic, as 37% say the shares are either fairly priced or too low.

Respondents see the S&P going above 4,500 by the end of this year and reaching 4,765 by the end of next year. The 10-year yield will only reach 2% by the end of next year.

“Asset inflation and historically tight credit spreads should be a clear warning sign for the Federal Reserve,” wrote Chad Morganlander, portfolio manager at Stifel Nicolaus. “We believe investors should hold quality assets and reduce leverage.”

But Richard D. Steinberg, chief market strategist at The Colony Group, believes stocks will remain attractive if the Fed pursues a policy of phasing out. “With a slow and steady message, equity markets could take it in stride and long bond yields will still remain uncompetitive for risky assets,” he said.