In each edition of the CNBC Fed Survey, we give the nation's top money managers, investment strategists, and professional economists an opportunity to tell us what they're thinking about the Federal Reserve, the economy, and the markets.
Here's what they told us in the September survey.
Lou Brien, DRW Trading Group: Unfortunately there are so many variables for Fed policy, Europe, etc., more uncertainty than I can recall, that I found it very difficult to toss my darts at this survey.
Robert Brusca, Fact and Opinion Economics: The Draghi Band-Aid leaves the fiscal cliff as the single biggest near-term economic risk. But the longer term risk from Europe is still very significant as the Draghi plan fixes nothing and papers over the structural cracks in EMU. The U.S. economy still has its own conundrums, among them, tax and public policy issues, and the need to sort out the problem of the huge future fiscal deficits. It is not clear if our politicians are prepared to address these dire issues and needs. Like Europe, when it comes to our biggest needs we have tended to kick the can down the road. We need someone to kick us in the can to get us going in the right direction on a different road.
Tony Crescenzi, PIMCO: No central bank ever created anything tangible – you won’t find any stories about a Fed chairman discovering electricity or creating the light bulb. What central banks are best at creating are fiat currencies, and these are only as valuable as what they are backed by, whether it be gold, silver, or the productive capability of a nation. The orderly liquidation of debt therefore requires not money printing but economic growth. Only with the restoration of growth, competitiveness, and external balance can developed nations solve their debt dilemmas.
Mike Dueker, Russell Investments: If many FOMC members meant what they said about needing to see "substantial and sustainable strengthening in the pace of the economic recovery" in order not to implement a third round of quantitative easing, then it is time for them to act, given the employment report and manufacturing ISM. Rate guidance alone will not raise nominal GDP growth to at least 4.5 percent at a satisfactory pace.
Mike Englund, Action Economics: The Fed signaled a likely September policy move in the prior minutes, and the last employment report should seal the deal around QE rather than a communication change. Nevertheless, there is likely little economic benefit from further QE action despite the defense made by Chairman Bernanke at Jackson Hole. The Fed is simply trying to look like part of the solution rather than part of the problem, which is really a "political" response to a desire to not be political.
Kevin Giddis, Raymond James/Morgan Keegan: The next three months will be critical for both the Fed and the U.S. economy. If something can't be done soon about the lack of job growth, I believe that we are destined for a new recession.
Ethan Harris, BofA Merrill Lynch Global Research: The U.S. and global economy are entering the most dangerous period of this economic recovery. If the fiscal cliff is badly handled at the same time that the European crisis enters another acute phase, a recession is likely.
Hugh Johnson, Hugh Johnson Advisors: The message of the financial markets collectively has been that (a) we face two significant risks (the fiscal cliff and Europe) (b) but neither will derail the current stock market-economic-interest rate cycle. Hence, the outlook for the stock market and economy is positive although not upbeat. We face a valuation issue in the equity markets which may, along with the disheartening political process, put near-term downward pressure on equity prices in September and October. This is likely to be, simply, a correction in an ongoing rise in equity prices. Although the Federal Reserve is likely to appease investors and Wall Street with a QE, it is unlikely that this will materially impact/help economic output. There exist ample reserves to support any given level of bank lending and monetary growth and, if you look closely, bank lending and money growth rates remain quite solid. It is hard to make the case for a contraction in the U.S. economy (and bear market) under these conditions. So...positive...but uninspiring.
John Kattar, Eastern Investment Advisors: QE has been made much more likely by the ECB's recent action. Controlling the dollar's rise is a policy objective of the Fed, whether they admit it or not. The next Fed easing will likely consist of a combination of asset purchases, swap lines with the ECB, and changes in the language of the statement.
Barry Knapp, Barclays PLC: Additional stimulus will have little to no macroeconomic effect. Financial conditions are not tight, so any increase in stock prices will not impact business confidence enough to change risk appetite. Business confidence is weak due to public policy uncertainty and external factors. The situation with consumer confidence is worse. Unsterilized QE risks even higher energy prices which could further depress confidence and impair consumer cash flow during the critical holiday spending period. Still, none of these costs will be evident in the near-term so equity investors may push stocks higher but in our view the costs outweigh the benefits.
David Kotok, Cumberland Advisors: We are re-writing all the textbooks. Old models fail us. The unintended consequences of present policies loom large and are unknown. Moral Hazard works that way.
Alan Kral, Trevor Stewart Burton & Jacobsen: Monetary influences on the economy are exhausted. Any further efforts are aimed at confidence.
Subodh Kumar, Subodh Kumar & Associates: The basics for banking now are lending, while they clean up investment banking. The basics for companies in this cycle remain improving efficiency.
Guy LeBas, Janney Montgomery Scott: What the Fed doesn't tell you is that they're adding fuel to the monetary fire in order to stave off deflation risk, not to directly boost job growth.
Drew Matus, UBS Investment Research: The Fed's QE3 program will likely create more problems than it solves. Our election model (based on percentage change in unemployment and bond yield during election years) currently has Romney with 50.1 percent of the popular vote. (Stat insig).
Rob Morgan, Fulcrum Securities: Recent Fed minutes show that many members believe additional 'monetary accommodation' would be warranted if incoming economic data does not show 'substantial and sustainable' improvement in the recovery. Friday's jobs report did not show that improvement so it is likely that QE3 will come during the Fed announcement following the September meeting.
Joel Naroff, Naroff Economic Advisors: Unless the economy is clearly in danger of faltering further, the Fed is not going to use a policy tool, QE3, that it knows is not very effective, since it does not want to risk losing total credibility.
David Resler, Nomura: The better off than four years ago question is complicated by the abrupt deterioration that occurred slightly less than four years ago. By many key objective metrics - employment, unemployment, real disposable personal income, household net worth - people are worse off than four years ago. But real GDP is a cumulative 1.9 percent higher than four years ago (compared to an average of 14.5 percent cumulative increase over all 16-quarter spans since 1947.)
John Roberts, Hilliard Lyons: While equity valuations remain attractive, uncertainty related to government policy, the election, and the "fiscal cliff" is holding back the economy and creating the chance for a pullback in the equity markets, as well as increasing the chance for a recession in 2013, which would vastly change our bullish outlook for the year.
Hank Smith, Haverford Investments: For a number of your questions in this survey it all depends on whether the "fiscal cliff" is averted or not. If the fiscal cliff occurs, the U.S. goes into a recession. If it is avoided (all current tax rates extended for a year and spending sequestration suspended) and comprehensive tax reform is enacted by the spring, our economic growth far exceeds current consensus forecasts.
Diane Swonk, Mesirow Financial: The political environment is undermining what little ammo the Fed has left. That will not stop them, however, from doing what they feel they have to do.
Robert Tipp, Prudential Fixed Income: The QE call for the next Fed meeting is a tough one. The inherent risks of additional QE, combined with the recent decline in Europe-related risk might argue for a 'wait and see' approach. However, it seems more likely that the Fed will take additional steps at this meeting to boost growth, with pushing out the 'low for long' language into 2015 and launching a sterilized Treasury and mortgage buy program. In any case, the subdued economic outlook suggests Treasury yields are likely to remain low and range bound. This will keep yield hungry fixed income investors moving into the spread sectors, including structured products, emerging markets, and both investment grade and high yield corporate bonds, driving their spreads relative to Treasuries down, and boosting their relative performance. Dovish Fed policy is likely to keep downward pressure on the U.S. dollar relative to many emerging and developed market currencies, boosting the returns on foreign bonds. At the nexus of these trends of declining European risk and stronger currencies, bonds of countries like Italy and Spain, uncertainties notwithstanding, may very well post some of the best returns in fixed income over the next few years.
Mark Vitner, Wells Fargo: I do not believe that QE3 will provide much of a boost but the Fed appears to have little alternative and needs to provide some insurance against fiscal risks.
Scott Wren, Wells Fargo Advisors: GDP growth is going to be well below trend this year and next. Unemployment is going to remain high from a historical perspective. The Fed's dual mandate means they are not going to sit on their hands and do nothing. There is plenty of liquidity in the system but you can't force people or businesses to borrow and spend. Once a credit bubble bursts it typically affects economic growth for years....this time will be no different. This is going to take time. We need clarity out of Washington (yes, we unfortunately need to count on our elected officials) on taxes, regulation, and the cost to hire an additional employee before businesses are confident enough to invest for the future. They can't make strategic decisions in this environment.
Clare Zempel, Zempel Strategic: Market monetarism's prescriptions afford the best chance to lift economic growth, reduce unemployment, and create an environment in which fiscal problems become tractable.
-By CNBC's Alex Crippen