Wall Street pros believe a Fall taper is already priced into markets: CNBC survey

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Wall Street is braced for the Federal Reserve to begin reducing the amount of its asset purchases as soon as the fall and believes that most—but not all—of the action is already priced into markets.

The 50 respondents to the July CNBC Fed Survey see the Fed reducing quantitative easing in October on average, compared with December in the prior survey.

The most popular response was September, chosen by 48 percent of respondents. On average, Wall Street expects the $85 billion of monthly purchases by the Fed to be reduced by $19 billion.

Fed Chairman Ben Bernanke, in a series of speeches over the past several months, has suggested the Fed could reduce QE if the economy improves as expected by the central bank.

(Read more: Why Wall Street is yawning over deficit: CNBC survey)

Total asset purchases this year are seen coming in at $921 billion, up slightly from the average June survey response of $883 billion. Wall Street looks for QE to continue until July 2014, about a month later than it did in the last survey and for the Fed to purchase $373 billion of assets next year.

Survey respondents, who include economists, strategists and fund managers, believe about 66 percent of the impact of tapering is already priced into both the Treasury and mortgage markets. But they say only about 58 percent of the impact is priced into equity markets, suggesting that stocks could get hit a bit harder when and if tapering becomes a reality.

"The discussion about when the Fed tapers misses the point," Guy LeBas of Janney Montgomery Scott wrote in response to the survey. "The power of QE-infinity was that it was an open-ended program. Now it no longer is. Therefore most of the damage to the bond markets was priced in when QE-infinity became QE-for-a-little-while."

(Read more: Wall Street wants Yellen, not Summers, as next Fed chief)

But Tony Crescenszi thinks the market may have overstated the impact. "The tale of the taper terror is tame: forthcoming reductions in the Fed's bond buying will be offset by reductions in issuance of mortgage-backed securities and Treasury securities," Crescenzi said. He noted that the Fed had been purchasing 45 percent of the total new issuance of mortgages. But if higher rates reduce that amount, the Fed will be buying 65 percent of the new issuance if it doesn't taper. Even a $10 billion taper of MBS purchases would keep the Fed's purchases at 55 percent of the market, he said.

Survey respondents see the Fed on track to halt QE entirely in July, 2014. That's a month later on average than the prior survey. The first rate hike is still seen coming in the second quarter of 2015.

Some want the Fed to act sooner and cut more aggressively. "The problems holding back economic growth are not monetary in nature and the risk of deflation is very low," wrote John Ryding of RDQ. "The Fed should taper more quickly and exit from zero rates. It won't, however!"

On average, respondents don't believe the Fed will taper its assets purchases if the unemployment rate, now at 7.6 percent, is above 7.3 percent. And they don't believe the Fed will end QE if the rate is above 6.71 percent.

Respondents to the CNBC Fed Survey marked down their growth outlook for 2013 below 2 percent for the first time this year, dropping it to 1.9 percent from an average of 2.1 percent in the June survey and 2.6 percent at the beginning of the year.

(Read more: Those GDP revisions...and why Kardashians matter)

The probability of a recession in the next year inched up to 16.2 percent, but remains low by historical standards of the survey. The biggest threat to the recovery remains tax and regulatory policy (30 percent) and slow job growth (22 percent). A rise in interest rates was the third most worrisome development (10 percent).

Europe continues to fade as a concern. It was singled out by just 8 percent of respondents as the biggest threat to the recovery, compared with 20 percent in April.

Wall Street looks for a fairly sharp climb in bond yields over the next year, with the 10-year yield in June, 2014 hitting 3.1 percent, compared with the current yield of 2.56 percent. But stocks will tread water over that time period. Respondents (who as a group have not correctly called the current rally) believe that stock prices will be unchanged from current levels by year end and up only 4 percent by June 2014.