Stanford economist and former international Treasury official John Taylor is thought to be the top pick for a Republican president, followed by former CEA director and Columbia University Graduate School of Business Dean Glenn Hubbard.
Market participants came closer to the Fed on the policy outlook because they came closer to the Fed on the economic outlook, which is to say, they became more pessimistic. Market participants downgraded their outlook for year-over-year GDP growth to 2.39 percent from 2.46 percent. They took nearly a quarter point off the outlook for growth in 2013 and now see GDP rising just 2.55 percent. As a result, they downgraded already muted expectation for the stock market. Respondents on average forecast the S&P 500 stock index will be basically flat through June and rise just 2.9 percent by year-end.
“Inflation will be higher in 2013 than the Federal Reserve is forecasting, prompting a shift toward restraint,” wrote Hugh Johnson of Hugh Johnson Advisors. “Tax and spending policy should shift toward restraint (hopefully not aggressively) in 2013. This combination is likely to impede equity price moves in Q4 and 2013.”
Market participants also lowered their outlook for the yield on 10-year U.S. Treasury notes to 2.4 percent by year-end from 2.6 percent in the March survey.
However, the probability of a recession in the next 12 months rose a bit to around 21 percent from 19.6 percent in March. It remains well below the 36 percent probability from the September survey. The chance that high gasoline prices by themselves will cause a recession declined a bit to 21.8 percent from 23.8 percent. “Energy prices would have to rise significantly and stay at an elevated level for a couple of quarters in order for us to become more concerned about recession,’’ said Joe LaVorgna of Deutsche Bank. “In our view, north of $150 on WTI is the point at which recession risk rises materially."
There was a significant shift in the issue that is seen as the biggest threat to the recovery, with 37 percent choosing the European financial crisis, compared to just 17 percent in March. Tax and regulatory policy was seen as the biggest threat by 27 percent of respondents, down from 36 percent in March.