The Fed likely will wait until November for taper announcement, CNBC survey indicates
The taper announcement cometh, but just not this week, according to the CNBC Fed Survey.
The survey of 32 market participants shows they expect the Federal Reserve to announce a reduction in its $120 billion in monthly asset purchases in November and begin to taper in December. It is anticipated that the Fed will reduce monthly purchases by $15 billion.
It is not expected that the Fed will raise its rates until next year.
According to Kathy Bostjancic (chief US financial market economist, Oxford Economics), “The difficulty for officials will not be continuing delinking the timing of tapering and eventual rate liftoff amid splittering views within FOMC.”
In early August, just before the spread of the delta variant became a concern, many forecast the announcement would come at this meeting. Only 17 respondents predicted that it would happen in November, while just a handful of them believe it will be happening tomorrow.
Among the minority are several who believe the Fed is taking risks with inflation.
John Ryding (chief economic advisor to Brean Capital), stated that Fed’s easing could lead to an inflation rate of 2%, which would prove costly to reverse and not provide any benefit for job creation. The Fed could make a serious policy mistake at this time, as it is falling behind.
Despite these concerns, market forecasts still for no rate increases until 2022. Actually, rates hike expectations have eased from the early spring optimism that accompanied the reopening.
In April, nearly two-quarters of respondents to the survey expected rate increases next year. One of these is not yet fully priced.
This could reflect the fact that respondents have reduced their forecasts for growth in the current year due to the widespread spread of Delta.
Outlook for GDP, stocks
Growth is now forecast at 5.7% for 2021, down almost a full percentage point from the July survey. The economic impact of the delta variant on GDP has impacted respondents’ outlooks for the future by 0.65 percentage point.
However, the effect boosted the unemployment rate outlook to less than 10% for this year. The forecast is for a decrease to 4.8%, from 5.2% currently, and then for another drop to 4% next.
Thomas Costerg (senior U.S. economist at Pictet Wealth Management) stated that “no crutches are needed anymore.” The U.S. consumer continues to prosper and is in good shape.
Some of this lost growth can be recovered in 2022, with GDP forecasts at 3.7% for that year. That’s up from the 3.4% forecasted in July. Many still consider inflation temporary but believe the Fed must reduce asset purchases in order to combat the threat. Inflation is expected to increase by nearly 4.4% in 2018, before falling to 3% next year.
“The proper question is how inflation can be brought to the Fed’s 2 % target without suffering a recession. Robert Fry from Robert Fry Economics stated that “I don’t think it can.”
CNBC respondents believe that the stock market has been overvalued in general.
The survey found that 56% of respondents believe the stock market has been overvalued in comparison to their prospects for earning and economic growth. This is the lowest number since the outbreak of the pandemic. 37% believe stocks are priced too high or fairly.
Respondents see the S&P topping 4,500 by the end of this year and rising to 4,765 by the end of next year. By the end of next years, the 10-year yield won’t exceed 2%.
Chad Morganlander from Stifel Nicolaus, portfolio manager, said, “Asset inflation should be a warning sign for the Federal Reserve.” Investors should invest in quality assets, and minimize leverage.
Richard D. Steinberg is chief market strategist for The Colony Group and believes that equities can remain attractive as long as the Fed follows a gradual tapering strategy. He said that equities markets might take the slow, steady message in stride while long bond yields would still be uncompetitive as risk assets.
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