The Fed Survey predicts a more aggressive approach to monetary policy tightening.

• According to the CNBC Fed Survey, the Federal Reserve is expected to increase rates in March and at least two additional times in 2023.
• Survey respondents anticipate that the central bank will start reducing its balance sheet in June.
• The Fed's two-day meeting, ending Wednesday, is anticipated to provide additional information regarding when it will increase interest rates and reduce the balance sheet.

The CNBC Fed Survey indicates that market expectations have become more aggressive for Federal Reserve policy tightening in the upcoming years, with respondents anticipating multiple rate hikes and substantial balance sheet reduction.

The first hike is now expected to occur in March, instead of June as previously predicted in the December survey. Respondents anticipate an average of 3.5 rate hikes this year, with some agreeing on four but others debating whether there will be a fifth. Half of the 36 respondents expect two or three hikes this year, while the other half anticipate four or five.

The forecast for a funds rate of just over 1% this year is based on the expectation of three additional hikes next year, which will increase the rate from around zero now to 1.8% in 2023 and a terminal rate of 2.4% reached in March 2024.

Diane Swonk, chief economist at Grant Thornton, wrote that the Fed's shift from patient to panicked on inflation in record time increases the risk of a policy misstep, given the complexity of inflation dynamics today.

The central bank is expected to provide more information about when it will increase interest rates and reduce its balance sheet during a two-day meeting that concludes on Wednesday. Chairman Jerome Powell will also speak to the media.

Respondents anticipate the start of balance sheet runoff to occur in July, earlier than the previously estimated November date. Despite the Fed's lack of a plan for balance sheet runoff, this is a preliminary look at how respondents envision it happening.

• This year, the Fed plans to reduce its balance sheet by $380 billion, and by 2023, it aims to remove $860 billion.
• The Fed will gradually increase its monthly runoff pace to $73 billion, which is significantly faster than the previous runoff in 2018.
• Over three years, the total runoff amounted to approximately one-third of the balance sheet, which was $2.8 trillion.

The Fed should consider reducing its mortgage portfolio before Treasurys, allowing short-term Treasurys to run off before long-term ones, and only reducing the balance sheet by not replacing securities that mature, rather than outright asset sales.

Chad Morganlander, portfolio manager at Stifel Nicolaus, stated that investors are not acknowledging the risks in the financial system. He pointed out that the wave of liquidity and the zero-interest policy have skewed all markets. In his opinion, the Federal Reserve should have changed its policy a year ago.

In the survey, a majority of respondents indicate that the Federal Reserve is behind the curve in tackling inflation.

Joel L. Naroff, president of Naroff Economics LLC, suggested that the Fed should begin by raising rates aggressively, with an initial increase of 50 bps, in order to later throttle back when supply chain issues resolve and inflation decreases.

While investors have slightly lowered their expectations for stock performance, they have significantly increased their outlook for Fed rate hikes. The S&P 500 is predicted to end the year at 4,658, a 5.6% increase from the Monday close. This is a decrease from the previously forecasted 4,752 for the end of the year. Additionally, the S&P 500 is expected to rise to 4,889 in 2023.

The probability of a 10% decline in the stock market over the next six months has increased to 52%, while the probability of a 10% gain has decreased to 38%, according to the latest CNBC Risk-Reward ratio survey.

The recent Covid omicron wave and the possibility of Fed tightening have led to a decrease in respondents' economic forecasts. The forecast for GDP this year has fallen from 3.9% in the December outlook to 3.5%, and the forecast for 2023 has decreased from 2.9% to 2.7%. Additionally, the average CPI forecast has been raised by approximately 0.4 percentage points this year to 4.4%, and to 3.2% next year.

This year, the unemployment rate is predicted to decrease from the current 3.9% to 3.6%. However, the probability of recession in the next year has increased from 19% to 23%, although it remains average. Inflation is perceived as the primary threat to the expansion, with 51% believing that the Fed will need to raise rates above neutral to slow down the economy.

If the pandemic continues to decline, with each subsequent wave of the virus causing less disruption than the previous one, the economy will be fully employed and inflation will be close to the Fed's target by the end of this year, according to Mark Zandi, the chief economist at Moody's Analytics.

An earlier version of this story reported that respondents' GDP forecasts rose for 2022 and 2023. However, the December survey revealed that their forecasts actually declined to 3.5% from 3.9% for 2023 and to 2.7% from 2.9% for 2023.