Fed to start cutting rates midyear in 2024 with high chance of soft landing, CNBC Fed survey finds

A majority of respondents to the CNBC Fed Survey predict that the Federal Reserve will commence rate cuts in June, albeit not as aggressively or swiftly as market expectations. The survey, comprising 35 economists, strategists, and analysts, forecasts an average of about 85 basis points of cuts next year. However, this projection falls short of the 120 basis points already priced into futures markets. Analysts urge the Fed to communicate a clear roadmap for rate cuts as inflation declines.

Soft Landing Odds Increase, Recession Probability Drops

Respondents show increased optimism, raising the probability of a soft landing to 47%, up 5 points from October. Simultaneously, they decrease the likelihood of a recession in the next year by 8 points to 41%, the lowest since spring 2022. Despite the positive outlook, the average respondent predicts a rise in the unemployment rate to 4.5% next year, with GDP just below 1%, indicating a baseline forecast of an economic slowdown.

Inflation Expected to Decrease, Consumer Resilience Highlighted

The survey forecasts a decline in inflation to an average of 2.7% by the end of next year, down from an expected year-end level of 3.2% for the Consumer Price Index. Approximately one-third of respondents anticipate the Fed hitting its 2% inflation target next year. Analysts emphasize the resilience of the U.S. consumer in the face of inflation and express optimism about a positive outcome, likening it to a “Rocky” ending.

Market Expectations Remain Modest, S&P 500 Predicted to Reach 5,000

Survey participants expect the S&P 500 to surpass 5,000 for the first time but not until the end of 2025. The average forecast indicates a modest gain through 2024, reaching 4,696. Analysts emphasize that stock market evaluations depend on economic growth, with 47% viewing stocks as overpriced in the event of a soft landing, compared to 91% if a recession occurs.

Quantitative Tightening (QT) and Market Uncertainty

The Fed’s quantitative tightening (QT) remains a wildcard for 2023. Respondents expect QT to cease, on average, in November 2024, with varying views on the exact timeline. Market uncertainty surrounds the end of QT, with respondents believing it will coincide with a reduction in the balance sheet to $6.2 trillion, down from the current $7.7 trillion. The majority anticipates an announcement of QT’s end in August, with potential tapering before the final termination.