Author: smarttalksucce

Amid heightened concerns about inflation, respondents to the CNBC Fed Survey believe the Federal Reserve will announce a decision to taper Wednesday and begin hiking interest rates considerably sooner than previously forecast.

Respondents to the survey overwhelmingly forecast that the Fed will announce a decision to reduce its monthly asset purchases in the statement Wednesday and begin tapering in November. The Fed is expected to reduce its $120 billion in monthly purchases of Treasurys and mortgage-backed securities by $15 billion a month, which would bring purchases to an end by May.

Respondents also moved forward their forecast for the first rate hike to September 2022 from December in the last survey.

But the September average masks a more aggressive outlook: 44% of the 25 respondents believe the Fed will raise rates by July, meaning rate hikes will follow the end of taper by just a few months.

Expectations for a modest pace of both tapering and hiking rates from the Fed were a source of criticism from many respondents: 60% believe inflation is a big enough concern that the central bank should halt all asset purchases now.

“The Fed’s current idea of dealing with inflation is to take their balance sheet from $8.5 trillion to about $9 trillion by next July and still have rates at zero,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, noting that the Fed will still be adding to its balance sheet while it tapers. “Inflation and the bond market response are about to run over the Fed.”

That criticism extends to the Fed’s go-slow approach on rate hikes.

“At some point, the Fed is going to have to accelerate its timetable for rate hikes or risk losing credibility,” said John Ryding, chief economic advisor at Brean Capital.

Fed funds futures markets have a 58% probability of the first rate hike in June and a 73% chance of a second increase by December.

Calls for faster tightening come as concern about inflation has risen to the No. 1 risk facing the economy, according to respondents, eclipsing Covid.

Forecasts for the consumer price index in 2021 rose for the seventh straight survey, standing now at 4.8% year over year, up from 4.4% in September. For 2022, the CPI is forecast to rise 3.5%, up from 3% in the September survey, a sign that inflation is believed to be moving further away from the Fed’s 2% target.

While 64% continue to say the recent increase in inflation is temporary, many still continue to sound the alarm bells. In fact, 40% want the Fed to address the problem with rate increases now. Just 26% say inflation has peaked, with expectations that the rate of price increases will continue to rise through January.

“The correct question to ask is, ‘Will inflation come back down to the Fed’s 2% target without a recession?’ I don’t think it will. I’d characterize the recent increase in inflation as ultimately temporary but very persistent,” said Robert Fry, chief economist at Robert Fry Economics.

Spending bills in Congress are adding to inflation concerns and prompting calls for more aggressive Fed tightening.

Forty percent say new spending by Congress will be inflationary if it is not offset by higher taxes and 36% say it will be inflationary even if it is offset. Twenty-four percent say it’s not inflationary and none of the respondents agreed with the administration’s claim that the spending would result in disinflation.

Nearly two-thirds believe the Fed should offset new spending by quickening the pace of its taper, and 40% prefer faster rate hikes in response compared with 56% who opposed such measures.

Respondents are sharply divided over the impact the spending bills will have on growth: 33% say they will add to GDP, 29% say they will reduce growth and 38% believe they will have no impact. On employment, 38% believe the new spending will add to jobs, 29% say it will reduce job growth and 33% expect it to have no effect.

On overall growth, the outlook continues to decline, with GDP forecast around 5% this year, down from 6.6% in the July survey and 3.6% forecast for next year.

On the outlook for stocks, CNBC launched a new question in the survey, the Risk/Reward Index, where it asked respondents to gauge the probability of a 10% upside and downside move in stocks over the next six months.

The first results show a 48% chance of a 10% downside move and a 39% chance of a 10% upside move, yielding an index of -9. Along similar lines, 72% believe that stocks are overvalued relative to their outlook for growth and earnings, up from 56% in the prior survey, but not as high as it was in the summer when it neared 90%.

Respondents believe the S&P 500 will actually fall half a percentage point between now and year-end and rise just 3% next year. Stocks are forecast to face a rising 10-year Treasury yield that hits 2.2% in 2022.

Treasury Secretary Janet Yellen said she has discussed with President Joe Biden how he should proceed on naming a Federal Reserve chairman and praised the current holder of the position.

Though she did not disclose any specific plans Biden has, Yellen said she gave solid marks to Chairman Jerome Powell.

“I talked to him about candidates and advised him to pick somebody who is experienced and credible,” Yellen told CNBC’s Ylan Mui. “I think that Chair Powell has certainly done a good job.”

Appointed to the top post by former President Donald Trump, Powell’s term expires in February. Biden is expected to name someone soon, and Powell is widely expected on Wall Street to be renominated.

However, the Powell Fed has come under criticism in recent weeks following disclosures that regional presidents — and Powell himself — had been buying and selling securities tied to the stock and bond markets at a time when Fed policy was underpinning Wall Street.

Two regional presidents resigned shortly after the disclosures. Powell faced some criticism over the matter in a recent congressional appearance, and leading progressive Sen. Elizabeth Warren, D-Mass., said she would vote against Powell if he is nominated for a second term. The Fed has since established an edict barring policymakers and senior officials from owning anything other than mutual funds in most cases.

Despite the controversy, Yellen said Powell has led the Fed well during an extraordinary time. Yellen was Powell’s immediate predecessor as the Fed chair.

“He responded very admirably to the crisis that we saw after the pandemic, and he’s established with his colleagues a new framework that is very focused on achieving full employment,” she said.

The Fed meets this week and is widely expected to announce that it soon will start slowly withdrawing the unprecedented economic help it has been providing since the early days of the pandemic.