It CNBC Fed SurveyMarket expectations for Federal Reserve policy tightening in the coming year have become more aggressive, as respondents are looking forward to multiple rate increases and significant reductions in their balance sheets.

The outlook for the economy is actually improving.

Now, the first rate hike will be in March. This is in contrast to the June forecast in December’s survey. Respondents anticipate 3.5 rate rises in 2019, which is a consensus of three, but debate remains over whether there should be a fourth. The majority of respondents expect two to three rate hikes in the coming year. Half see at least four, while half anticipate five or six.

Three more hikes will be made next year. This means that the funds rate is expected to be just above 1% in 2019, 1.8% in 2023, and 2.4% in 2024, which would mark the conclusion of the hike cycle.

Diane Swonk of Grant Thornton was the chief economist and wrote, “The Fed pivoted from patient-to panicked on inflation in record time,” in her response to the survey. Given the current complexity of inflation dynamics, this increases the likelihood of missteps in policy.

Two-day central bank meeting concludes Wednesday. It is expected that it will give further clues about when and how it will increase rates. Jerome Powell, Chairman of the central bank will address media.

Balance sheet runoff begins in July. This is much more than what was seen in the previous survey which had it begin in November. Although the Fed is yet to develop a plan for balanced sheet runoff, this first glimpse at what respondents think it might look like: 

• The $9 trillion deficit will be wiped off by $380 billion this year, and it will fall to $860 billion by 2020.
• The Fed will gradually increase the monthly runoff rate to $73 billion, which is much faster than 2018’s.
• $2.8 trillion of total runoff is approximately one-third of the balance sheets over three years.

Many support the Fed cutting the Treasury’s mortgage portfolio first, so that short-term Treasurys can run off before longer-term Treasurys. The balance sheet will be reduced by not replacing older securities.

Chad Morganlander from Stifel Nicolaus, portfolio manager said that “investors underestimate the risks in the financial sector.” All markets have been distorted by the wave of liquidity, and zero-interest policies. Federal Reserve ought to have changed policy one year ago.

91% say that the Fed has been late or not at all in dealing with inflation.

Joel L. Naroff (president, Naroff Economics LLC) responded to the survey by saying that “The Fed should begin raising rates aggressively” which is 50 bps at first. This will allow it to throttle back later if/when supply chain problems start resolving their self and inflation falls as a result.

Although respondents had a lower outlook on stocks, they were only slightly more optimistic than those who boosted their prospects for Fed rate rises. These are the results. S&P 500The year ends at 4,658, a 5.6% rise from Monday’s close. This is down from December’s forecast of 4752. The S&P is forecast to rise to 4889 in 2023.

CNBC Risk-Reward ratio (which measures the likelihood of stocks falling 10% or increasing by 10% over six months) fell from -11 to -14 in the previous survey. On average, 52% of stocks will experience a 10% decrease in six months. This compares to 38% of stocks experiencing a 10% increase.

Although Fed tightening prospects have increased, the economic outlook of respondents actually improved. Forecasts for GDP increased by half a percentage point to 4.46 percent this year and 3.5% in 2023. This is about the same as last year. Expectations for greater inflation are driving higher real and inflation-adjusted GDP growth. The outlook for CPI has been raised by about 0.4% this year, to 4.4% next year, and 3.2% in 2020.

This year, the unemployment rate should fall to 3.6% from its current 3.9%. Although the likelihood of a recession occurring in the coming year increased to 23%, it is still about average. The Fed is expected to increase rates to stop the economy from slowing down, and 51% of those surveyed believe inflation will be the biggest threat to expansion.

Mark Zandi of Moody’s Analytics, chief economist wrote that “Assuming that the pandemic recedes – each subsequent wave of virus disruption is less than the preceding one – by the time next year, the economy will be in full employment with inflation at or near the Fed’s target,”