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CNBC Fed Survey: CNBC’s Steve Liesman: Trump’s Protectionism Biggest Threat to U.S. Economy’s Growth, Respondents Say

Trump's protectionism biggest threat to US economy's growth, CNBC Fed Survey respondents say

Steve Liesman | @steveliesman

Concern about protectionism from President Donald Trump is clouding the outlook on Wall Street, with respondents to the January CNBC Fed Survey saying trade policies could overshadow the effects of the administration's pro-growth plans.

Protectionism is seen as the No. 1 threat to U.S. expansion by 51 percent of respondents, almost double the percentage from the December survey and the first time in the survey's history that any single concern has been expressed by a majority. It eclipses the 44 percent who were worried about global economic weakness early in 2016 — concerns that sent markets into a nosedive.

"Investors can get behind pro-growth policies and can't and won't support protectionist policies," Art Hogan, chief market strategist at Wunderlich Securities, said in response to the survey. "Trade wars, like all wars, end negatively for all."

The contrast between respondents' views on trade and other economic policies of Trump is stark. Seventy-five to 95 percent of participants, who include economists, fund managers and strategists, have positive views of Trump's plans to cut individual and business taxes and deregulate the economy. But 83 percent have negative views of his trade agenda.

"Trashing the Mexican economy with tariffs and other bad policies is like throwing rocks through your neighbors' windows, thereby reducing the value of YOUR home," wrote Robert Fry, chief economist at Robert Fry Economics.

Indeed, 58 percent say Trump's relations with Mexico will lead to less growth for both countries and 53 percent say the same about China. And respondents believe overwhelmingly that China, Mexico, Canada and Japan will retaliate if the U.S. imposes import tariffs on those countries.

Robert Brusca, chief economist at Fact and Opinion Economics, was one of the few to see any upside in Trump's trade policies. He said they were a "danger but an investment in the future." Brusca sees the global trade system as unfair to the U.S. "We have not had the benefits of free trade, and we have less to lose from this Trump gambit than most people think," he said. "I suspect Trump wants leverage more than tariffs."

Respondents say the possibility of protectionism is confusing forecasts for both growth and monetary policy. "It will be very difficult for the FOMC to gauge the impact of any rate increases with the possibility of simultaneous protectionist trade policies and large deficit spending,'' said John Donaldson, director of fixed income at Haverford Trust.

That may be one reason why growth forecasts are far from the 4 percent Trump suggested his policies could ignite. Respondents on average see growth rising 2.5 percent in 2017 and 2.75 percent in 2018. Both estimates are higher than before the election but only about 25 basis points for this year and 40 basis points for next year.

"The president is very hard to handicap, and I don't really know how much he can get done when Congress must be dealt with to make the kind of sweeping changes he proposes," said Kevin Giddis, head of fixed income capital markets at Raymond James Financial. "While the trend for interest rates is up, I wouldn't be surprised if something happens or doesn't happen that could turn the cart on its head."

But most do not see a recession. The probability of the U.S. entering a recession remains at a low level of 18.5 percent.

When it comes to Fed rate hikes in 2017, three looks to be the charm.

The CNBC Fed Survey shows respondents expecting three rate hikes this year, up from two before the elections, and the same number as the average Federal Reserve official. That's a rare agreement; survey respondents for the past several years have been more dovish than the outlook from Fed officials and they've been right.

Respondents, however, seem out of sync with financial markets, which appeared to be priced for just two hikes this year. A 43 percent plurality see the next rate hike coming in June, but some 53 percent say it could happen in either March, April or May.

The Fed Funds rate is forecast to rise to 1.3 percent this year and 2.2 percent in 2018. But James Paulsen, chief investment strategist at Wells Capital Management, thinks the Fed could do more this year because he sees more inflation. "I believe a potential wild card for 2017 is not only how many times will the Fed raise the target funds rate but the possibility that they may opt for a 50 basis point single move," Paulsen said.

Compared to the December survey, more respondents look for an earlier wind down to the Fed's balance sheet. Nearly 40 percent say the Fed could begin to reduce its $4 trillion balance sheet this year, up from 27 percent in December. And just 13 percent now say the Fed will never reduce the balance sheet, down from 31 percent.

About three-quarters say Trump is unlikely to reappoint Janet Yellen as Fed chair, with Stanford economics professor John Taylor seen as the leading candidate for her replacement.

Concern about trade also seems to be muting the outlook for stocks. The S&P is seen closing the year around 3 percent higher, but the 10-year Treasury yield is seen rising to nearly 3 percent by the end of the year. The policies of the new administration are seen to be mostly responsible for the market rally, but 56 percent say the market is too optimistic about the outlook for policies from the new administration.

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