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U.S. Federal Reserve Chairman Jerome Powell speaks during a news conference after the Federal Open Market Committee’s two-day meeting on interest rate policy in Washington, U.S., November 7, 2024.
Annabelle Gordon | Reuters
respondents CNBC Fed Survey They are sure by December Federal Reserve they will cut rates on wednesday, but they are not sure if they should do less.
Among the expectations that inflation will be slightly higher than in the previous survey and unemployment will be lower, 93% see a reduction of a quarter of a point. But only 63% think that’s what the Fed should do. The forecast for 2025 includes just two more cuts of a quarter point, down from three in the last survey, with the funds rate falling to 3.8% next year and 3.4%, or above the neutral rate, by the end. of 2026
A big unknown is the fiscal policies of the incoming administration. The respondents expressed various opinions: from the concern of higher inflation to the attitude in favor of growth.
“Early indications are that the Trump election has stirred up animal spirits among consumers, households and small businesses,” wrote Troy Ludtka and Joseph LaVorgna, economists at SMBC Nikko Securities Americas. “Depressed sentiment in these areas has hampered the US economy since the Covid pandemic. As a result, we see that the economic outlook has brightened materially.”
But the survey of 27 respondents, including economists, strategists and fund managers, showed that expectations of President-elect Donald Trump’s tariffs and divestment threats dampened the rise in some forecasts.
“I don’t remember being so uncertain about the inflation outlook,” said economist Robert Fry. “President-elect Trump offers us a mix of inflationary policies (tariffs, individual cuts) and disinflationary policies (deregulation, spending cuts). Who knows what combination we’ll end up with?”
Inflation risks
The majority of 56% of the respondents believe that the consequences of the policies of the next administration that will be implemented are “somewhat inflationary”, and another 11% believe that they are “very inflationary”. They are divided on the impact on growth, with 41% seeing the policies as “something positive” for growth, and 41% as “something negative”.
The biggest risks to the expansion are high inflation and global economic weakness, with the third tie coming between the administration’s fiscal policies and the size of the US deficit. Several survey participants specifically wrote in “tariffs” as a major threat.
There is some doubt about the purpose of the tariffs and whether they are just bargaining tactics. Overall, 37% say the tariffs are a negotiating tactic that will be temporary, 19% believe it will be a more permanent revenue stream, and 41% believe it will be a combination of the two. Two-thirds say the threatened 25% tariffs on Mexico and Canada will depend on negotiations, but 70% expect President-elect Trump to implement additional 10% tariffs on China.
“The economy remains surprisingly strong and the only risks on the horizon are from potential tariffs and the displacement of essential, largely irreplaceable immigrant workers,” wrote economist Joel Naroff.
Stock gains may be limited from here
The respondents raised their point of view S&P 500 next year, but they increasingly see stocks as overextended. From current levels, the S&P 500 is projected to rise just 3% next year and 7% by 2026. But 69% of participants see stocks too expensive for a landing scenario — the most in the 17 months since CNBC asked the question.
“At almost 25 times the consensus forecast earnings for the S&P 500, the valuation looks very good,” said Subodh Kumar, chairman of Subodh Kumar & Co. “Compared to long-term sustained annual earnings growth, markets now appear to be assuming twice as much… For the S&P 500, operating margins peaked. In mid-2021, they’re on the decline and rates add to the pressure.”
The probability of a recession next year hit a two-year low of 29% and nearly 70% predicted a soft landing. The forecast for gross domestic product has risen gradually this year and next, slightly above the potential economy at 2.5% this year and cooling to 2.1% in 2025 and 2026.
“The labor market is tighter at the start of Trump’s second term than it was in November 2016,” said John G. Lonski, president of The Lonski Group. “The more the economy grows faster than 2.5% quarter over quarter, the greater the risk of an inflationary tightening of the US labor market.”
Richard Bernstein, CEO and founder of Richard Bernstein Advisors, said: “Financial conditions are very easy, but the Fed thinks it needs to cut rates… More inflation than the current consensus suggests is the final path.”
