According to a CNBC survey, the Fed may not cut rates as many times as anticipated due to the economy's continued growth.

• The probability of a soft landing increased to 52% in the latest CNBC Fed survey from 47% in the January survey.
• The likelihood of a recession occurring in the upcoming 12 months decreased to 32%, a decline from 39% in January and 63% in November, as per the survey.
• On average, economists, strategists, and fund managers anticipate three cuts this year, according to survey respondents.

The CNBC Fed Survey forecasters are increasingly optimistic that the U.S. economy will avoid a recession and achieve a soft landing, with little expectation of growth slowing significantly below potential in the near future.

The potential downside of the better forecast is that the Fed may not ease as much, with officials at their meeting this week possibly forecasting fewer rate cuts in 2024 than they did in December.

John Donaldson, director of fixed income at the Haverford Trust Co., wrote that the narrative that the U.S. economy is so fragile that it cannot survive without ultra-low rates has been debunked and discarded into the rubbish bin of history in response to the survey.

The March survey shows that the probability of a soft landing is 52%, higher than the 47% recorded in January and the first time it has been above 50% since the question was first asked in July. Meanwhile, the probability of a recession in the next 12 months has fallen to 32%, the lowest since February 2022, and down from 39% in January and 63% in November.

"Scott Wren, senior global market strategist at the Wells Fargo Investment Institute, stated that the U.S. economy is moving towards a moderate growth and moderate inflation environment. Although initial expectations may not be met, the trend is still positive."

The Fed's two-day meeting concludes on Wednesday, with the central bank predicted to maintain the federal funds target rate within the range of 5.25% to 5.5%. The CNBC Fed Survey participants are economists, strategists, and fund managers.

Despite the general poor track record of forecasters in predicting recessions, a survey of 27 respondents, including economists, strategists, and fund managers, predicted a recession in 2023 with a high level of certainty. However, this prediction did not come to fruition. While the average recession probability has decreased, about 20% of respondents still believe there is a significant chance of a downturn in the next 12 months.

According to Robert Fry of Robert Fry Economics, the reduction in the federal funds rate in his forecast is dependent on a recession that reduces inflation. He has a 60% chance of a recession and predicts the Fed will cut rates to 3.6% by the end of the year from the current rate of 5.38%.

Rate cut forecasts

On average, survey respondents still see three cuts this year, resulting in a funds rate of 4.6%. Despite futures markets' initial euphoria about rate cuts, respondents never became as optimistic as the markets predicted, and they haven't had to backtrack from the six cuts that the markets priced in. However, some believe the Fed could still be more hawkish at the upcoming meeting.

Janney Montgomery Scott's chief fixed income strategist, Guy LeBas, stated that the recent slight increase in inflation readings has closed the door on a rate cut at the moment. He added that there is a high probability that the dot plot will include two rate cuts in 2024.

In December, the Fed predicted three interest rate cuts for the year.

The biggest risk to the economic expansion, according to 46% of respondents, is continued high inflation, while half of respondents believe the biggest risk is that the Fed cuts too late.

The average funds rate forecast for next year is expected to decrease to 3.6% from the previously forecasted 3.9% in September, according to respondents.

The forecast predicts a slight economic slowdown, with GDP growth forecasted at 1.6% this year, down from 2.5% last year, but still above the 0.7% forecast for 2024 made in July. Despite this, the economy is expected to rise slightly above this level to around 2% in 2025. While not a boom, it's also not as much of a slowdown as has been predicted in prior surveys.

The March forecast indicates that the 2024 outlook has increased for the third consecutive time. As a result, it is now predicted that GDP will not fall below 1% in any of the next four quarters, which was a common feature of the more negative forecasts from the previous year.

Inflation forecast

Although there will be some growth, the inflation reduction this year is expected to be only modest. The Consumer Price Index is predicted to decrease to 2.7% from the current 3.2%, and it is forecasted to fall to 2.4% next year, which is close to the Fed's 2% target for the PCE Price Index. Since CPI is believed to be about half a point above PCE, the decrease in CPI is expected to be only modest.

The unemployment rate rises to 4.2% from 3.9%, but remains stable until 2025. Mark Zandi, Chief Economist at Moody's Analytics, advises the Federal Reserve to declare victory and gradually reduce short-term interest rates while winding down its QT.

The balance sheet runoff, or QT, is now expected to end in January instead of November, according to the prior survey. The Fed is predicted to reduce its total reserves by approximately $1 trillion to $6.7 trillion before stopping quantitative tightening and allowing bank reserves to decline to $2.9 trillion from the current level of $3.6 trillion.

A 37% plurality of respondents believe that neither the Fed stopping too early nor the Fed stopping the runoff too late is a significant risk.

Although a soft landing is now the preferred outcome for a majority of survey respondents, 58% also believe that equities may be "somewhat overpriced" for this scenario. As a result, gains in the S&P are expected to be muted, with only 1.8% growth this year and 5.8% next year from the current level. These returns are not far off or even better than what investors could receive by buying risk-free one or two-year treasury notes, posing a persistent challenge to equities from bonds if interest rates remain high. The 10-year is expected to remain around 4% for this year and next.

Hugh Johnson, an economist, predicts that the equity market will face a more challenging environment in 2024 before recovering.

According to Richard Sichel, senior investment strategist at The Philadelphia Trust Company, the Fed is not in a rush to lower interest rates. He believes that current rates are more normal than they have been in fifteen years. Therefore, a diversified high-quality stock portfolio should continue to provide good returns.