CNBC Fed Survey

Expect a December, not September, hike for rates: Fed survey respondents

Fed survey: 90% expect Fed to hold rates for now

Prepare for a holiday hike.

That's the message from the latest CNBC Fed Survey, where 90 percent of the 41 respondents say the Federal Reserve won't increase interest rates at its September meeting this week. But 88 percent say the hike is coming in December.

"Expect the Fed to stay on the sidelines until after the election so they cannot be characterized as impacting the election in any way," said John Roberts, senior vice president and director of research of Hilliard Lyons. "Recent economic statistics have been ambiguous enough to provide the Fed cover for such inactivity."

But the near unanimity over what the Fed will do masks widespread disagreement over what the Fed should do. Jim Bianco, founder of Bianco Research, wrote, "The longer the Fed goes without hiking, the more its credibility is hurt."

Janet Yellen, chair of the U.S. Federal Reserve, pauses while speaking during a meeting of the Board of Governors of the Federal Reserve in Washington.
Andrew Harrer | Bloomberg | Getty Images

And Mark Zandi, chief economist of Moody's Analytics, wrote: "I think the Fed will make a mistake if it doesn't raise rates by 25 bps this week, which seems likely. The job market is strong and very close to full employment, inflation is close to target and set to accelerate, financial markets are in good shape and the global economy is stable. They have a window to raise rates, and they should go through it."

On the other side, Mark Vitner, senior economist of Wells Fargo, said: "When GDP growth has struggled to average even 2 percent growth, the global economy is shaky and the most recent month's economic data are inexplicably weak, you do not raise interest rates!"

"God bless Lael Brainard,'' wrote Donald Luskin, chief investment officer of Trend Macrolytics, a reference to the Fed governor who recently offered a detailed speech of why the Fed shouldn't hike.

Respondents say global economic weakness, inconsistent U.S. data and the failure of the market to price in a hike will stay the Fed's hand this week. The election is also seen playing a role, but not because the Fed wants to help one of the candidates; it's more because respondents say the Fed does not want to influence the election either way.

On average, respondents see the Fed funds rate ending the year at about 60 basis points, which would be consistent with a single quarter point hike. Next year, the funds rate is forecast to rise to 1.16 percent and to 1.8 percent in 2017. The terminal rate, or where the Fed will stop hiking this cycle, is forecast to hit 2.48 percent, about 20 basis points higher than the prior survey and closer to the Fed's own long-run rate of 3 percent.

Respondents, who include economists, fund managers and strategists, think it will take the Fed two years to get to that terminal rate, meaning they take the Fed at its word that rate hikes will be gradual.

Gradual hikes happen in a context of what the survey shows is an expectation of just modest growth and inflation over the next couple years. GDP is forecast to increase 1.82 percent this year from last year, and bump up to just 2.28 percent in 2017. Headline inflation, now running at 1.1 percent, is forecast to rise to 1.5 percent this year and just over 2 percent next year.

The outlook for stocks is similarly underwhelming. Respondents on average peg the level of the S&P at the end of 2016 at just 2,160, about a half a percentage point higher than the current level. In 2017, the S&P will rise to 2,255, or a 5 percent gain from the where it is now.

The 10-year yield is forecast to 1.78 percent this year and 2.28 percent by 2017.

Amid slow growth prospects, respondents increased the chance of a recession in the next 12 months to 1 in 4 from 1 in 5, the highest level since January. For most of last year, the probability was in the mid-teens, so it's a noticeable jump. Economists, however, generally say that in any given year there's a 1-in-5 chance of recession in the next year, so the current estimate in the survey is only somewhat above that level.

Respondents were critical in the survey of how the Fed decides on interest rate policy. Nearly 60 percent say the Fed pays too much attention to the latest high-frequency data in making policy and 66 percent say it's too concerned with the market's reaction to policy.

"There is a need to move toward normalization and I think Fed officials have tied their hands because of their "data dependency" decision making process," wrote Jack Kleinhenz, chief economist for the National Retail Federation.

By contrast, 78 percent say the Fed is paying the right amount of attention to international and financial developments, one of the main reasons cited by forecasters for why the Fed is expected to be on hold this month.