By: Steve Liesman | CNBC Senior Economics Reporter
CNBC.com | Tuesday, 11 Dec 2012 |
Wall Street's concerns about Washington are escalating, with theDecember CNBC Fed Survey finding growing investor angst about a recession, thefiscal cliff and the Fed's monetary policy.
The 48 economists, fund managers and strategists who responded tothe survey rank the "fiscal cliff" as the top threat facing the U.S.economy and, partly as a result, put the chance of recession in the next yearat a 13-month high of nearly 29 percent.
"The fiscal cliff conversation has edged its way to the 'headof the class' when considering the possibility of a new recession," saysKevin Giddis, Raymond James/Morgan Keegan.
Pimco's Tony Crescenzi sees an even bigger problem looming."The medium to long-term budget problems of the United States are far moreimportant to the ultimate destination of markets than is the 'fiscalcliff.'"
While 46 percent say we won't go over the "cliff,"compared to 41 percent who say we will, 13 percent say they are unsure, meaningthat 54 percent either believe we will go over the "cliff" or can'tsay either way.
Respondents estimate going over the "cliff" will reducegrowth by 1.6 percentage points, a large drag for an economy expected to growonly around 1 percent in the fourth quarter at an annual rate. GDP growth in2013 is now expected to be just 1.92 percent, down from a September estimate of2.21 percent and continuing a persistent slide in the outlook for next yearfrom a high of 2.75 percent in March. The effects of the "fiscalcliff" are expected to persist into 2014 when it will shave growth by 0.6percentage points.
Haverford Trust's John Donaldson warned, "Allowing theeconomy to 'go over the cliff' would be extremely reckless. The possibility ofunintended consequences is almost limitless."
The only good news on the cliff: 43 percent believe that if theU.S. does goes over, it will last for "only a few weeks." Another 28percent believe it would last for a few months.
With downbeat expectations for the "cliff" and theeconomy, Wall Street sees a flat stock market through year-end and only a 4percent rise for the benchmark S&P 500 stock index through June of nextyear.
On the Fed, Wall Street is starting to worry about the centralbank's continuing quantitative easing. (Explain this) Drew Matus at UBSInvestment Research said, "QE is the roach motel of policy: once a centralbank checks in, they can never check out."
Fed Survey respondents overwhelmingly look for QE4 to be announcedafter this week's FOMC meeting ends on Wednesday, with monthly asset purchasesshooting up to $85 billion from $40 billion as the Fed replaces "OperationTwist" with outright asset purchases
Under "Twist," the Fed sold short-term securities andbought long-term U.S. Treasury bonds. A plurality of investors now expects theFed to replace "Twist" with $45 billion in additional asset purchasessplit between treasuries and mortgage-backed securities. That would add to theFed's existing $40 billion QE program.
By the end of the year, respondents anticipate the Fed's $2.8trillion balance sheet will grow by more than $700 billion; 35 percent say itwill increase by $1 trillion or more. But in a sharp reversal from September,respondents are now overwhelmingly concerned that Fed purchases will begin toimpair market functioning and pricing, a key concern for the Fed, which hasargued that it could conduct its QE operations without reducing liquidity.
Chris Rupkey of Bank of Tokyo-Mitsubishi said the Fed"wrecked the money market and now their actions are wrecking the bondmarket... As long as they keep doing this it tells the public the economy isstill not right in their view. This policy is starting to look like amistake."
And by a 3-to-2 margin, investors believe that more QE will notlower the unemployment rate, which the Fed has specifically mentioned as a keyaim of the program. Investors do, however, believe that QE will be successfulat reducing bond yields and mortgage rates, a sign that Wall Street doesn'tbelieve lower interest rates will reduce joblessness.
Marking the first time CNBC has asked the question, Wall Streetbelieves that an unemployment rate of 6.5 percent and an inflation rate of 3.4percent are the key levels that would prompt the Federal Reserve to halt itsasset purchases. But Wall Street, by a slim 49 percent to 45 percent, does notbelieve the Fed will adopt explicit economic targets. If it does, 75 percent ofrespondents say it should be inflation compared with just 43 percent sayingunemployment.
Markets still look for the Fed to remain on hold through 2015,although there was an increase in the percentage who see the Fed acting totighten policy in 2014.
Rupkey, however, isn't sure we need to think about the future. Hejoked, "I think we are all doomed. 'Fiscal cliff' pales in importanceagainst the end of the world forecast by the Mayan calendar. Get your affairsin order, this ship is going down."
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