Some worry that the Fed may not cut rates, despite the likelihood of doing so, according to a CNBC survey.

The CNBC Fed Survey for December indicates that respondents are confident the Federal Reserve will cut rates on Wednesday, but they are less certain about whether it should.

Despite predictions of higher inflation and lower unemployment, 93% of respondents anticipate a quarter-point rate cut. However, only 63% believe it is the appropriate action for the Fed to take. The outlook for 2025 now calls for two additional quarter-point cuts, down from three in the previous survey, resulting in a funds rate of 3.8% by the end of next year and 3.4%, which is just above the average neutral rate, by the end of 2026.

The incoming administration's fiscal policies are uncertain, and respondents expressed a range of opinions, including worry about higher inflation and optimism for growth.

"According to Troy Ludtka and Joseph LaVorgna, economists at SMBC Nikko Securities Americas, initial indications suggest that the Trump election has boosted consumer, household, and small business confidence, which has been low due to depressed sentiment since the Covid pandemic. As a result, the economic outlook has improved significantly."

Some forecasters' upside was dampened by the survey of 27 respondents, which included economists, strategists, and fund managers, indicating that President-elect Donald Trump's tariffs and threatened deportations negatively impacted their outlook.

"Economist Robert Fry stated that he has never been as uncertain about the inflation outlook as he is now, due to President-elect Trump's mixed policies of inflationary (tariffs, individual tax cuts) and disinflationary (deregulation, spending cuts). The uncertainty lies in the combination of policies we will ultimately end up with."

Inflationary risks

The incoming administration's policies are likely to have inflationary effects, with 56% of respondents seeing them as "somewhat inflationary" and 11% as "extremely inflationary." On the growth effects, 41% of respondents view the policies as "somewhat positive," while 41% see them as "somewhat negative."

High inflation and global economic weakness pose the biggest risks to the expansion, followed closely by the incoming administration's fiscal policies and the size of the U.S. deficit. Several survey participants identified "tariffs" as a top threat.

The purpose of tariffs is uncertain, with 37% believing they are temporary negotiating tactics, 19% seeing them as permanent revenue measures, and 41% expecting a combination of both. Two-thirds believe the 25% tariffs on Mexico and Canada will depend on negotiations, while 70% expect President-elect Trump to carry through on the 10% additional tariffs on China.

According to economist Joel Naroff, the economy is doing well, but the only threats to its stability come from potential tariffs and the possibility of losing important, irreplaceable immigrant workers.

Stocks' gains may be limited from here

Participants have raised their expectations for the next year but are becoming increasingly concerned about the overextension of equities. The S&P 500 is predicted to rise by just 3% next year and 7% by 2026. However, 69% of respondents believe that stocks are currently overpriced for a soft-landing scenario, which is the highest percentage in the past 17 months that CNBC has asked the question.

"Subodh Kumar, president of Subodh Kumar & Co., stated that the S&P 500's valuation is 25 times the price-earnings multiple on consensus-anticipated earnings, which appears excessive. In comparison to the sustained 7% annual long-term earnings growth, current markets are assuming twice as much. The S&P 500's operating margins peaked in mid-2021 and are currently declining, while tariffs add to the pressures."

The probability of a recession in the next year is at a two-year low of 29%, with nearly 70% forecasting a soft landing. Gross domestic product forecasts for this year and next have increased, with the economy running slightly above potential this year at 2.5% and cooling to 2.1% in 2025 and 2026.

"According to John G. Lonski, president of The Lonski Group, the labor market is currently tighter at the start of Trump's second term compared to its state in November 2016. The longer the economy grows faster than 2.5% annualized quarter-to-quarter, the greater the risk of an inflationary tightening of the U.S. labor market."

Richard Bernstein, CEO of Richard Bernstein Advisors, stated that despite financial conditions being relatively easy, the Fed feels compelled to cut rates. He believes that more inflation than the current consensus is the likely outcome.