The Federal Reserve will execute a gentle, staged exit strategy that won't begin until the end of this year at the earliest and will put the Fed Funds rate just 50 basis points higher 13 months from now, according to the latest CNBC Fed Survey.
The 62 participants in the survey actually lowered their outlook for the Funds rate in June 2012 to an average of 75 basis points, down from 90 basis points in the April survey.
Even in December 2012, the Funds rate only rises to an average of 1.37 percent, compared with 1.67 percent in the April survey.
Respondents, who include economists, fund managers and strategists, also cut their outlook for growth and the level of the S&P 500. They now see growth of just 2.77 percent this year, compared with a 3.07 percent forecast in April. The S&P is seen hitting 1367 in December, about 2.7 percent lower than the prior forecast.
Scott Wren of Wells Fargo wrote in response to the survey: "The market setback is only temporary. After the 100 percent gain in the SPX since the March '09 lows and the likelihood of the Fed beginning to verbally prep the market for rate hikes in 2012, it would be typical for the market to take a mid-cycle timeout before beginning the second up leg of this cyclical bull market."
Market participants now virtually rule out QE3 with 82 percent saying there will be no additional purchases after the current QE2 program ends in June. That’s up from 66 percent in the April survey.
In fact, 54.8 percent say the Fed is too easy, up from 52.2 percent in April. “The Fed has been far too accommodative and is threatening significantly higher inflation even if it ends QE2 as scheduled,” said John Ryding of RDQ Economics. “Economic growth is not being held back by tight money. (It is the) wrong strategy.”
But Constance Hunter of Aladdin Capital is among the few predicting another $500 billion of Fed bond purchases, saying, “If we get a Greek default, which is looking increasingly likely, then I think you are looking at a conversation about QE3.”
Overall, however, the market consensus for an exit strategy looks like this: 61 percent think the Fed will get drop the language promising to remain low for an extended period in the second half of 2011, with most believing it happens in the fourth quarter. About 60 percent also think the Fed in the second half of this year will end its policy of reinvesting the proceeds of securities that mature.
The next step comes by the first quarter of 2012, when 58 percent of the market forecasts the first Fed Funds rate hike. “As the economy moves further and further ahead after the end of the recession, the day is drawing closer that they will start to normalize interest rates. Bet on it,” wrote Chris Rupkey of Bank of Tokyo-Mitsubishi.
Market participants are less certain about when the Fed will begin asset sales. Just 38 percent since see the Fed beginning to wind down the size of its balance sheet by selling assets in the first half of 2012. Yet, 42 percent don’t believe asset sales will begin until the second half of 2012 or later.