The Federal Reserve has a growing credibility problem with markets when it comes to monetary policy.
In its statement last week, the Fed said economic conditions are "likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
The March CNBC Fed Survey, however, finds that nine out of 10 market participants don’t believe the Fed will wait that long. In fact, 54 percent believe the first Fed interest rate hike will come by 2013.
“There is no way the Fed will fulfill its pledge of keeping rates at present levels until 2014,’’ wrote Rob Morgan of Fulcrum Securities in response to the survey. “I'm shocked that some market watchers are still talking about another round of quantitative easing…The big risk for the Fed is falling behind the inflation curve.”
"“I'm shocked that some market watchers are still talking about another round of quantitative easing… The big risk for the Fed is falling behind the inflation curve.”"
The survey, which includes responses from 67 economists and equity and fixed income managers, shows disagreements with the Fed beyond just the date of the first rate hike.
More than half of respondents think Fed policy is “too accommodative,” a sizable jump from the January survey when just 37 percent thought the U.S. central bank’s policy was too easy.
A third of market participants say the Fed’s characterization of the economy in its policy statements is “too pessimistic,” with 63 percent saying it’s just right.
“The Fed's current monetary policy is unsustainable beyond the U.S. election, and risks undermining its credibility,” wrote David Goerz of Highmark Capital.
The percentage of respondents looking for additional quantitative easing in the next 12 months fell back to 33 percent, the lowest level since July. About two-thirds of respondents see no additional QE.
Asked what other actions the Federal Reserve could take to drive down long-term yields, 43 percent said “none,” while 39 percent expect the Fed to purchase additional securities while sterilizing those purchases with asset sales of some kind or repo operations.
“The Fed is being cautious given all the risks out there, but once European default issues and gasoline price hike concerns are moderated, the Fed will have to consider lightening up their pessimistic view,” wrote economist Joel Naroff.
Highlighting the shifting sentiment, John Augustine, Fifth Third Asset Management, said, “The Fed needs to start formulating an exit plan.”
The changed sentiment comes with a somewhat more upbeat mood on the economy. The probability of recession in the next year has fallen to 19.1 percent, down from 36 percent in September and 20.3 percent in January.
But the group does not see especially strong growth. Gross domestic product in 2012 is seen growing 2.46 percent year over year, up just a tenth from the January survey. A bit more optimism crept into the 2013 outlook with GDP forecasts averaging 2.74 percent compared with 2.59 percent in January.
“Recent data are decidedly constructive, and there is now a chance that the recovery in employment will become a transformative event, leading to a self-perpetuating recovery,” wrote David Resler of Nomura Securities.
Several factors continue to hold back economic optimism. Respondents said the biggest threat to the recovery is tax and regulatory policy, chosen by 36 percent, followed by high gasoline prices (26 percent). The European financial crisis was the top threat for only 17 percent of market participants.
“Three things continue to keep me up at night: housing, employment, and the euro zone debt crisis,” Scott Wren, Wells Fargo Advisors, wrote. “None of these problems are going away anytime soon.”
But Stuart Hoffman of PNC thinks past recovery disappointments are not prologue. “The spring/summer slump in housing, consumer spending, and job growth in 2010 and 2011 will NOT be repeated in 2012,” he wrote. “The third time is the charm!!”
