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Wall Street Still Divided on Fed Easing But Optimistic on Economy

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images
Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.

Market participants are divided on whether the Federal Reserve will ease again, but have grown somewhat more optimistic about the economy, according to the January CNBC Fed Survey.

About half of survey respondents believe there will be a third round of quantitative easingfrom the Fed in the next year, unchanged from October; 44 percent say it’s not in their forecast and 8 percent are unsure.

"QE3 is not necessary and could be counterproductive to achieving the Fed's dual mandate," PNC economist Stuart Hoffman wrote. He was one of 75 economists, equity, and bond-fund managers and analysts to respond to the CNBC survey.

Those who predict the Fed will launch another round of quantitative easing believe it will be 24 percent larger than they did in the October survey. The average forecast is for $567 billion of QE, up from $457 billion. Fifty-eight percent of those who think the Fed will act believe it will do so by April.

Meanwhile, respondents put only a 20 percent probability on the U.S. entering another recession in the next 12 months, down from 25 percent in October. Their 2012 GDP growth forecast nudged up to 2.45 percent from 2.37 percent in the prior survey.

"Barring a European meltdown, growth is likely to continue accelerating and be stronger than expected which will cause the Fed to be more optimistic by the end of the year," wrote Joel Naroff of Naroff Economic Advisors.

"We're increasingly concerned about the level of 'Eco-phoria' that has infected the markets." -Janney Montgomery Scott, Guy LeBas

But the group has it skeptics."We're increasingly concerned about the level of 'Eco-phoria' that has infected the markets," said Guy LeBas of Janney Montgomery Scott. "That is, the interpretation of recent 'ok' economic data has been far more optimistic than the underlying numbers justify." He’s concerned about the market being disappointed with the fourth quarter 2011 growth tally, now projected to be around 3 percent.

Survey respondents marked down their outlook for the S&P 500 index. They now project it will hit 1329 on June 30, compared with their average forecast of 1358 in the October survey. By December, however, they see it rising to a strong 1387, a gain of around 5.5 percent from Friday’s close.

Europe remains the most important wild card in most forecasts and fully 88 percent of respondents expect Greece to default in the next three years; 48 percent see a Spanish default and 28 percent predict a default by Italy.

In a significant change, 63 percent believe that some countries will be ejected or leave the euro zone in the next five years, up from 52 percent in the October survey.

"While everyone is focused on raising money, the real issue is how to restore competitiveness," said Robert Brusca of Fact and Opinion Economics. "And that is hard to fix without a depreciation of the currency, and that can't be done without leaving the euro zone."

Mark Zandi of Moody’s Analytics was more upbeat on Europe. He wrote, "It won't be a break-out year for the (U.S.) economy, but 2012 will be better than 2011. Europe remains the most serious threat to this optimism, but with the ECB's recently aggressive actions, it is receding as a threat."

More than two-thirds of the market participants approved of the Fed’s decision to publish its members’ forecasts of the fed funds rate. That begins Wednesday. But there was skepticism about its effects on markets and the economy. About a third said it would lead to higher stock prices and lower bond yields. Just 20 percent believe it will help with job creation.

Still, the move has its supporters because it will increase the clarity of monetary policy. "The publication of the interest rate assumptions behind the FOMC forecasts will make the forecasts easier to interpret," wrote John Ryding of RDQ Economics. "At the present time we have forecasts based on unpublished policy assumptions, which makes the forecasts for the out years difficult to interpret."

James Paulsen, Wells Capital Management holds the opposite view: "I fail to understand how 'diverse interest rate forecast' and constant 'chatter' by 12 members of the Fed with 'diverse views' provides clarity to the financial markets and businesses."

While the Fed has forecast it will keep rates low through mid-2013, 48 percent of survey respondents actually see the Fed’s first rate increase in 2013; 41 percent don’t forecast a rate hike until after 2014. There are also strong divisions on the outlook for the balance sheet: 48 percent believe the Fed will take action to reduce the total assets it holds before the end of 2013; 46 percent put the date after 2014. But the biggest single group, 18 percent, don’t see the Fed taking steps to reduce its balance sheet until 2015 or later.

Finally, David Kotok of Cumberland Advisors responded to the survey from Chile, noting, “Fly fishing is more predictable than economic outcomes. More fun, too.”

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