A month of worrisome headlines—from gathering weakness in Europe to the spread of Ebola to U.S. shores—has markets believing in a more dovish Federal Reserve, according to the latest CNBC Fed Survey.
As the Fed begins its two-day meeting Tuesday, the survey of 39 money managers, economists and advisors shows market expectations have been pushed out for the first Fed's rate hike and how quickly rates will rise. Respondents now forecast, on average, the first rate hike in July 2015, a month later than the September survey. Instead of reaching 0.98 basis points, the average respondent now sees the Fed hiking to 0.89 basis points by the end of next year.
"The global economy slowing down (particularly Europe along with their sovereign debt issues) … is the biggest risk to financial markets,'' Scott Wren of Wells Fargo Advisors wrote in response to the survey. "The biggest potential surprise for 2015 is that the Fed does not hike the target rate all year.''
Others agreed with Wren on the possibility that the Fed could be even more dovish than they currently believe. Asked about the biggest risk to their Fed forecast in 2015, 64 percent said it's that the Fed is more dovish than they expect, up from 53 percent in the September.
Respondents also see the Fed taking longer to increase rates. The average end point of the current cycle is now seen as a 3.3 percent funds rate. But the Fed is now not expected to hit that level until the fourth quarter of 2017, a quarter later than the prior survey.
"Recent volatility has been a useful reminder that the path toward normalization of monetary policy will be anything but a straight line," said John Donaldson of Haverford Trust Co.
However, market participants do not seem to be factoring in much risk to the U.S. economy from the recent round of negative headlines. Participants still see 2.9 percent growth next year, unchanged from the September survey, and about 70 basis points better than this year. They also forecast a very low probability of recession—just 15 percent—in the next 12 months.
The rosy outlook has its doubters, including Thomas Costerg from Chartered Bank, who writes, "The consensus has tended to overestimate U.S. GDP growth and my worry is that expectations for 2015 are starting from a high point; there is a risk of disappointment, once again. The U.S. consumer may be in a more fragile state than expected.''
Market participants rate the European economic slowdown as the biggest global risk. They are twice as worried about Europe as they are about the economic threat from the spread of Ebola. After Europe, the next biggest risk is seen as a slowdown in Asia, followed by ISIS and troubles in Ukraine and Russia.
Three quarters of respondents to CNBC's October Fed Survey see the European Central Bank launching an outright quantitative easing program, with the average respondent believing it will come as soon as February. European economic weakness has catapulted into the No. 1 threat facing the U.S. economic recovery as well, eclipsing both slow job growth and tax and regulatory issues. But the Street is still attaching a low probability to QE 4; just 18.4 percent believe the Fed will launch a new QE program in the two years after the current one ends, up 4 points from the September survey. A full 97 percent say the current QE program will be ended at the meeting this month.
Fed policy still appears to enjoy modest support from this group of respondents, with 49 percent saying policy is "just right," up from 43 percent in the September survey. Still, a substantial 44 percent say the central bank is too accommodative.
Market participants seem unconcerned with the risk either of inflation or deflation, with both ranking low on the list of risks to the U.S. recovery. The Consumer Price Index is seen rising by 2 percent in 2015, down from the forecast in the prior survey of 2.3 percent.
"The Fed has consistently missed its (2 percent) target on inflation,'' said Diane Swonk of Mesirow Financial. "The Fed will have to more aggressively combat slowing inflation going forward; this is yet another reason for gradualism.''
Recent market turmoil has taken a toll on optimism for equities. Respondents shaved 38 points off their outlook for the S&P 500 for the end of 2015, and now see a 2,111 level. The outlook for the 10-year yield also was marked down to just 2.9 percent by next June, compared with the prior average of 3.16 percent.