CNBC Fed Survey

A Fed hike is coming in December, according to a CNBC survey, whether the market believes it or not

Key Points
  • On average, survey respondents see two to three rate hikes next year and forecast the end of the Fed's rate-hike cycle in 2019.
  • The outlook has been clouded by the Fed's plans to shed balance-sheet assets and by inflation that is running below its target rate.
  • Respondents say the Fed can let the economy run a bit hotter than it may believe.
Fed Survey: 76% expect third rate hike in December

While market prices suggest less certainty, 76 percent of respondents to the CNBC Fed Survey believe the central bank will hike interest rates in December.

Various market-based gauges put the probability at 43 to 55 percent. On average, respondents to the survey see two to three hikes next year, and the Fed is forecast to finish its rate hike cycle in the second quarter of 2019 at a 2.9 percent rate.

The outlook for the Fed has been clouded by its plans to reduce its $4.5 trillion balance sheet, likely as soon as next month, and by inflation running below its 2 percent target. Meanwhile, more Fed officials have grown concerned about the impact of low rates on markets.

"The Fed is confronting two very different sides of inflation. Asset prices are rising too rapidly, while prices of goods and services are climbing too slowly,'' wrote Lynn Reaser, the chief economist at Point Loma Nazarene University in response to the survey. "Monetary policymakers will need to choose a side and any decision will entail large risks."

All the 42 respondents to the survey, who include economists, fund managers and strategists, believe the Fed won't hike at the meeting that begins Tuesday, and 68 percent say the central bank will begin reducing its $4.5 trillion balance sheet by October.

The balance sheet runoff is forecast to take 4.4 years to wind down to around $2.5 trillion. Reducing the balance sheet is viewed as a slight negative for economic growth, a bit worse for stocks. But overall, expectations are for only modestly negative effects.

Survey respondents see only modest effects on growth this year and next from the recent hurricanes and actually have dialed in more growth than they have subtracted. GDP is forecast to grow 2.2 percent this year and 2.6 percent in 2018. Most participants lowered their outlook for growth from the storms this year but raised it for next year by a greater amount.

"The hurricanes will mask the underlying trend in the economy but the Fed members are likely to consider the net impacts to be positive and move ahead with the rate and balance sheet normalization process," said Joel Naroff, president of Naroff Economic Advisors.

But some believe the Fed will be cautious this year. "The Fed wants to be careful when they begin the balance sheet normalization process and may not want to cloud the process with a December hike,'' wrote Mark Vitner, a managing director and senior economist at Wells Fargo Securities. "If they do not raise rates in December, we would expect more tightening in 2018. Our end point is the same regardless."

Overall, respondents think the Fed can let the economy run a bit hotter than it may believe. On average, the group said unemployment could shrink to 3.7 percent before sparking inflation. And 45 percent said they see little connection between unemployment and inflation, a relationship known as the Phillips curve — a principal way the Fed thinks about inflation: That is, low unemployment can drive up wages and inflation.

"The Phillips curve is dead," said Allen Sinai, chief global economist and strategist at Decision Economics, predicting "relatively low inflation for a long, long time because of technology."

The chance of recession is a relatively low 19 percent, down a bit from July, and protectionist trade policies are seen as the biggest threat to the U.S. economy followed by geopolitical risks.

Expectations for stock price gains this year and next continue to rise, with the 500 forecast to hit 2,515 this year on average and 2,593 next year. It was around 2,500 in Tuesday's premarket. But the 10-year Treasury is forecast to end the year at just 2.42 percent, and not even hit 3 percent in 2018. It as at 2.218 percent early Tuesday.