CNBC Fed Survey

Election will push Fed rate hike to December, CNBC survey respondents say

CNBC survey: 86% expect December rate hike
CNBC survey: 86% expect December rate hike

On the 11th day before Christmas, the Fed will give the Street: One quarter-point hike.

The CNBC Fed Survey finds that 100 percent of respondents do not expect a rate hike at the Fed's meeting this week, but 86 percent see one coming in Dec. 13-14 meeting.

The reason: the presidential election. Asked why the Fed won't announce a hike at the conclusion of its two-day November meeting on Wednesday, 55 percent of the 39 respondents said it's because of the presidential election, and 26 percent said it's because markets are unprepared for a hike. Among those who see next Tuesday's election influencing the Fed, the vast majority say it's because the Fed doesn't want to influence the outcome either way, rather than to help either candidate.

Janet Yellen, chair of the U.S. Federal Reserve, exits after a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, June 15, 2016.
Andrew Harrer | Bloomberg | Getty Images

"The Fed never wants to be seen as an influencer of a presidential election," Rob Morgan, chief investment officer at Sethi Financial Group, wrote in response to the survey. "They won't raise rates at the November meeting."

Morgan's certainty about no rate hike this week is mirrored in a certainty about December. David Kotok, chairman of Cumberland Advisors, wrote: "A December hike is widely anticipated. The Fed will deliver a negative surprise if it fails to hike a quarter point in December."

Yet respondents, who include economists, fund managers and strategists, continue to push down their outlook for how far the Fed will go in hiking rates and push back how quickly it will get there. Respondents see the fed funds rate rising to just 1.09 percent by the end of next year and to 1.81 percent by the end of 2018, with both down from the average forecast in September. And the Fed is forecast to stop hiking rates at just 2.4 percent and not get there until the first quarter of 2019, a quarter later than the prior survey.

Indeed, some are unconvinced of the need for the Fed to hike at all. "Given weak price pressures and slow economic growth, there is little reason for the Fed to raise interest rates in the immediate future," wrote Dean Baker, co-director of the Center for Economic and Policy Research.

But Allen Sinai, chief economist of Sinai, Decision Economics, said: "The economy looks good. Inflation starting to move up and noticeably so."

Where the market is divided is on the issue of whether low interest rates are helping or hurting the economy. About third of respondents say low interest have no effect on the economy, a third say they hurt and a third say it helps.

Those who say it helps cite benefits to borrowers, pushing investors into riskier assets and spurring capital investments. The other side see those benefits as negatives, saying low rates are misallocating capital in the economy, creating asset bubbles and hurting savers.

"Monetary policy is doing nothing to stimulate economic growth at this point but it is promoting resource misallocation, risky investment behavior … and hurting the largest generation of retirees,'' wrote John Ryding, chief economist of RDQ Economics.

The market is similarly divided over recent comments by Fed Chair Janet Yellen that there could some benefit to running a "high-pressure economy," with 49 percent saying the Fed should run one and 43 percent saying it shouldn't. "It's hilarious that Yellen thinks, at this point, she has the power to wave a magic wand and 'run a high-pressure economy,'" wrote Donald Luskin, chief investment officer of Trend Macrolytics.

Wall Street expects modest gains for stocks and bonds this year and in 2017. The S&P is seen rising to 2,174 by year end and 2,242 in 2017. "Our year-end S&P target continues to be 2,190, with strong Q3 earnings pushing the market higher, while uncertainty around the political situation and Fed push the market down into year-end,'' wrote John Roberts, director of research of Hilliard Lyons.

The recent run-up in yields has influenced the outlook for rates, with respondents on average seeing the benchmark note ending the year with a 1.91 percent yield, up from 1.78 percent in the prior survey last month.

Respondents look for growth around 1.8 percent this year and 2.2 percent next year, and they expect inflation to tick up slightly this year and next. Global economic weakness is still judged to be the biggest threat to the U.S. recovery, followed by tax and regulatory policies. The probability of the U.S. entering recession decreased slightly to 23.2 percent.

Several respondents said they expect increased federal government spending under either administration to help the economy next year: "This is bullish for U.S. growth, inflation and employment,'' said Neil Dutta, head of economics at Renaissance Macro Research.

Wall Street still expects a Hillary Clinton White House, with 82 percent saying Clinton will win the election, up from 51 percent in the September survey. By a 46 percent to 39 percent margin, Donald Trump's policies are still seen as best for the economy, but Clinton gained ground against Trump on the issue. On the question of who is best for stocks, Clinton has pulled away, with 62 percent favoring her policies for equities, nearly 10 points over Trump.

More than half of respondents said the current presidential campaign is negative for the economic outlook.

The survey was conducted Thursday through Saturday.