According to a CNBC Fed Survey, there is a high chance of a soft landing when the Fed begins cutting rates midyear in 2024.

• According to the CNBC Fed Survey, a majority of respondents indicated that the Fed would begin cutting rates in June.
• The probability of a soft landing at 47% has increased by 5 points from the October survey, while the probability of a recession in the next year has decreased by 8 points to 41%.
• On Wednesday, the Fed will announce its economic outlook and the 35 survey respondents, who are economists, strategists, and analysts, will provide their insights.

The CNBC Fed Survey suggests that next year's outlook is improving, with cuts in rates, a higher chance of a soft landing, and lower inflation.

According to the CNBC Fed Survey, respondents anticipate the Federal Reserve to begin rate cuts next year, although not as aggressively or as quickly as markets have predicted. In June, more than half of respondents have a reduction factored in, increasing to 69% by July. On average, the respondents forecast about 85 basis points of cuts next year, which is roughly one 25 basis point reduction per quarter, but not as much as the 120 basis points that have been priced into futures markets.

John Ryding, chief economic advisor to Brean Capital, suggests that the Fed should start planning a roadmap for rate cuts, which could signal tighter policy, as cuts will not immediately reflect the decline in inflation and real rates will continue to rise, according to a survey.

According to Kathy Bostjancic, the chief U.S. economist at Nationwide, the markets have overestimated the likelihood of rate cuts beginning in Q1. However, she predicts that the Fed will eventually cut rates due to continued disinflation, which may occur around mid-year.

The 35 survey respondents, including economists, strategists, and analysts, are divided into hawks and doves regarding the possibility of rate cuts next year.

Peter Boockvar, chief investment officer at Bleakley Financial Group, believes that Powell still holds the memories of the 1970s and will be more stubborn in keeping monetary policy tight for a longer period than markets desire.

Michael Englund of Action Economics predicts that the U.S. headline y/y inflation metrics will decline sharply in early-2024 due to weak energy prices and easier comparisons, giving the Fed room to tighten monetary policy even if core year over year inflation rates remain stable.

Soft landing chances

The probability of a soft landing increased by 5 points to 47% in the latest survey, while the probability of a recession in the next year decreased by 8 points to 41%, the lowest since spring 2022.

The unemployment rate is predicted to increase to 4.5% next year, and the GDP is expected to fall short of its potential by about 50%, indicating that the economic outlook is not optimistic and that a slowdown is the most likely scenario.

According to Joel Naroff of Naroff Advisors, indications of a decrease in consumer and business spending can be seen through a relaxation in hiring, growth in income, and a decline in confidence.

Diane Swonk, chief economist at KPMG, argues that the U.S. consumer has successfully challenged the Federal Reserve's efforts to combat inflation. The key to a successful outcome lies in a "Rocky" ending, where the consumer remains resilient and able to recover after the Fed signals a rate cut.

The consumer price index is predicted to decrease its inflation rate from 3.2% to 2.7% by the end of the next year. Approximately one-third of respondents believe the Fed will achieve its 2% inflation target in the upcoming year, with 37% forecasting it to happen in 2025 and 28% predicting it to occur after 2025 or never.

According to Steven Blitz, chief U.S. economist at TS Lombard, the FOMC in 2024 will accept 3.5% inflation but not a recession. With 61% of adults owning equities, the highest since 2008, the Fed will not sacrifice its faith in equities for the sake of 2% inflation. Fed officials have maintained that they will continue to pursue 2% as their inflation target.

Modest market expectations

The possibility of the Federal Reserve ending quantitative tightening in 2024 is uncertain, with 55% of respondents predicting it will happen in the first or second half of the year, 30% expecting it to occur in 2025 or later, and 13% unsure.

The Federal Reserve is expected to stop quantitative tightening (QT) with its balance sheet at $6.2 trillion, compared to the current level of $7.7 trillion and with bank reserves at $2.6 trillion, down from the current level of $3.4 trillion. This implies another eight or nine months of QT to reduce bank reserves to the average expected level. Fed officials have not specified a level, but respondents believe they could announce an end to QT as soon as August and will likely taper QT, or gradually reduce the amount of runoff, before bringing it to an end. When the Fed announces the end of QT, 56% believe it will also say that it will allow all of its mortgage and agency-backed securities to roll off of its balance sheet, 15% say it won’t and 29% do not know.

According to the CNBC Fed Survey, respondents predict that the S&P 500 will surpass 5,000 for the first time at the end of 2025, with a modest gain of less than 2% through 2024 to 4,696. However, the forecast is contingent on economic growth, with 47% of respondents viewing stocks as overpriced if there's a soft landing, compared to 91% who believe stocks are overpriced if there's a recession.

Subodh Kumar, the president of Subodh Kumar & Associates, believes that the equity markets are in a state of uncertainty, unable to move beyond the highs set at the end of 2021 or to sustain a traditional correction.

According to Barry Knapp, managing partner at Ironsides Macroeconomics, an equities earnings recovery in a "V" shape is unlikely due to contracting bank credit.