According to a CNBC Fed Survey, the Fed is expected to cut rates by a quarter point with a soft landing.

Despite uncertainty about the Federal Reserve's actions at its upcoming meeting, survey respondents anticipate a slower pace of rate cuts than what is currently reflected in market prices.

According to the survey, 84% of the 27 participants, which include economists, fund managers, and strategists, predict that the Fed will cut interest rates by a quarter percentage point, while 16% anticipate a half-point reduction. This is in contrast to the 65% probability of a half-point cut that is currently reflected in the fed futures markets.

In 2025, survey respondents predict a year-end funds rate of 4.6% and 3.7%, while the futures market forecasts 4.1% and 2.8%.

"John Donaldson, director of fixed income at Haverford Trust Co., wrote in response to the survey that he believes the equivalent of eight cuts in six meetings is more than what will happen. This forecast aligns with a hard landing rather than a soft landing."

According to Barry Knapp from Ironsides Macroeconomics, there is a possibility that the FOMC may not fulfill its expectations, possibly in both instances.

The Fed's decision to cut interest rates has sparked a debate among markets, with some calling for a 25 basis point cut and others advocating for a 50 basis point reduction. This uncertainty is unusual for a Fed that has been transparent about its intentions at almost every meeting.

Soft landing expected

While futures markets are more concerned about the economy than survey respondents, a majority of respondents believe the Fed has enough time to gradually cut interest rates. Specifically, 74% of respondents said the September rate cut is timely to prevent a hard landing, while only 15% disagreed.

The probability of a soft landing remains at 53%, similar to March, while the chance of a recession has increased to 36%, five points above its lowest point in June but below the 50% level that dominated 2022 and 2023. The growth outlook for this year and 2025 has decreased slightly, from 2% to 1.7%, two tenths below the July survey, but still within the potential range and not a recession.

According to Michael Englund of Action Economics, the economy is expected to grow faster than anticipated in 2024, giving the Fed the opportunity to lower rates gradually.

According to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, the upcoming Fed cuts are more likely to align with the "mid-cycle correction" trend, as seen in 1995, 1997, and 2019, rather than signaling the end of the cycle recessionary trend.

The unemployment rate is projected to increase slightly, with forecasts showing a rise from 4.2% to 4.4% and 4.5% for this year and next, respectively, which is about two-tenths higher than the previous survey.

Too late?

Diane Swonk, chief economist at KPMG U.S., believes that Powell's legacy is at stake if he fails to execute a soft landing after waiting too long to raise rates in 2021. Neil Dutta of Renaissance Macro Research argues that a half-point cut would not spook markets, but there are real risks if the Fed only goes a quarter point.

While 50% of respondents believe equity valuations are roughly in line for a soft landing, 97% say they are significantly or somewhat overpriced for a recessionary outcome.

The S&P is expected to see gains of around 3% by the end of next year, with the index falling to 5546 by year end, according to the average forecast.