CNBC Fed Survey: CNBC's Steve Liesman: Wall Street Betting Fed Keeps QE Coming

Wall Street Betting Fed Keeps QE Coming: CNBC Survey

By:Steve Liesman

CNBC Senior Economics Reporter| Tuesday, 19 Mar 2013

Wall Street has boosted its outlook for quantitative easing (QE) from the Federal Reserve and reduced its concerns about a recession in the next year to the lowest level in 20 months, according to the March CNBC Fed Survey.

The 54 respondents to the survey, including economists, analysts and money managers, now believe the Fed will purchase $917 billion of additional assets this year in its open QE program, up from $858 billion in January. The new total works out to around $76 billion monthly, which remains below the current$85 billion pace.

"The Fed must be encouraged by the effect their policies are having on the markets,housing, and the economy, and will see no need to change what seems to working,'' wrote John Kattar of Ardent Asset Advisors. "Still, they will eventually have to prepare investors for an exit. At some point they will begin to talk about a tapering of QE, although that may not become a reality until next year."

Not surprisingly, the date when the Fed is expected to stop QE has been pushed ahead six months to May 2014 from November in the prior survey.

And there is now even greater agreement that the Fed will stop QE by tapering, or gradually reducing, its purchases with nearly 90 percent of the market expecting it. On average, respondents believe the tapering will begin in January, a month later than in the prior survey.

Still,market participants are skeptical about the ability of QE to help the economy.Nearly 70 percent believe QE will not lower the unemployment rate, up from 58 percent in January. By a 48 percent to 44 percent margin, respondents do not believe QE will lower bond and mortgage yields. But they overwhelmingly believe it will help stocks, with 75 percent saying QE can help boost stock prices up from 69 percent in January. But some do believe that has to change.

Passing the Baton

"Weare now at the 'show me' stage of the market cycle," says ChadMorganlander of Stifel Nicolaus. "The baton has to be passed from aliquidity induced rally to more of an economic and earnings driven rally.Fundamentals are gradually improving but equity valuations seem fairlyvalued."

Respondentssay about 28 percent of the stock market rally is attributable to the Fed, 24percent to an improving economic outlook and 18 percent from an improvement inthe corporate earnings outlook.

Amidexpectations of more QE, Wall Street downgraded the probability of a recessionin the next 12 months to 17.6 percent from 20.4 percent, marking the secondsurvey in a row that the probability has declined. Fears of recession hadratcheted up to 28.5 percent in September.

"Theeconomy is moving forward; Washington is a sideshow; Fed is on autopilot. Avery good scenario for stocks," said John Augustine from Fifth Third AssetManagement.

Notall are in agreement. "We believe a recession/economic slowdown is apossibility in the latter half of 2014 or early in 2015,' wrote John Roberts ofHilliard Lyons. "Some of the excesses that could cause a recession arebeginning to build in the economy."

Respondents'average growth forecast, however, remained mostly unchanged with the outlookfor 2 percent GDP growth in 2013 and 2.6 percent in 2014.



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