With significant uncertainty about what the Federal Reserve (Fed) will do at its meeting this week, respondents to CNBC's Fed Survey predicted a more gradual approach to rate cuts than what the market currently expects.
The survey showed 84% of 27 respondents, including economists, fund managers, and strategists, expected the Fed to cut rates by a quarter of a percentage point, with 16% seeing a half-point cut. This compares with the 65% probability of a half-point cut currently priced in by the Fed futures market.
This difference has become more pronounced over time, with survey respondents predicting year-end funds rates to be at 4.6% and 3.7% by the end of 2025, compared to 4.1% and 2.8% in the futures market.
Barry Knapp of Ironsides Macroeconomics said, "We suspect the FOMC will deliver lower promises or lower yields, perhaps both."
The study is on one side of a debate that has divided markets in the past few days over whether the Fed will cut 25 or 50 basis points, creating unusual uncertainty for the Fed, which almost always gives clues at each of its meetings. (1 basis point equals 0.01%)
On the other hand overall, the probability of a soft landing is 53%, about the same since March, while the chance of a recession has increased to 36%, five points above its low in June, but well below the 50% level that prevailed throughout 2022 and 2023. Growth projections remains at 2% for this year and declines to 1.7% for 2025, two-tenths below the July study, but still around potential and not recessionary.
"The economy is growing faster than expected in 2024, and the Fed has time to gradually lower rates," said Michael Englund of Action Economics.
"While there are economic risks, the Fed's next rate cut is more likely to be a 'mid-cycle correction,' as in 1995, 1997, and 2019, rather than an end-of-cycle recessionary trend," wrote Guy LeBas, chief fixed income strategist, Janney Montgomery Scott.
The forecast for the unemployment rate rose slightly. Compared to the current rate of 4.2%, unemployment is expected to be 4.4% and 4.5% for this year and next year, both about two-tenths higher than the previous study.
The S&P has shown gains for the year, based on average forecasts, with the index falling to 5546 at the end of the year, a little more than 1% below current levels. Average forecasts put the S&P at 5806 by the end of next year, just a 3% gain from now.
