Federal Reserve Poised for Rate Pause, Survey Reveals Economic Sentiments
- 93% of fund managers forecast a pause in Fed rate adjustments in October.
- 76% anticipate a rate hike in December, with more than half expecting two hikes in 2027.
- Risks include high inflation, the ongoing Iran war, and potential election-related uncertainty.
The Federal Reserve has significant tasks ahead, but action is unlikely in October according to CNBC’s latest Fed Survey of 30 fund managers, strategists, and economists. The survey indicates that 93% expect the Fed to pause rate changes at its upcoming meeting, while 76% predict a rate increase at the December meeting. More than half of the respondents believe that the Fed will implement approximately two rate hikes in the following year.
Richard Bernstein, global head of macro investing at Janus Henderson Investors, commented on the Fed’s hesitancy to raise rates, stating, “Their hesitancy to raise rates is unfathomable after an extended period of monetary and fiscal generosity, with nominal GDP running 6-8%, and when the leading indicators of inflation are uniformly warm to hot.” Meanwhile, 40% of respondents contend the Fed should lower growth below potential to address the inflation issue, compared to 27% who maintain it’s unnecessary to slow the economy.
The survey highlighted that 70% of participants view the inflation issue as extensive, extending beyond just rising energy prices. The U.S. crude oil benchmark is anticipated to reach $88 a barrel in six months, an increase from $82 in September but still lower than the current $101 level.
While 30% of respondents advised hiking rates at the upcoming meeting, dissenting votes are expected from at least two Fed officials. John Ryding, chief economic advisor for Brean Capital, pointed to strong demand data as a key factor urging for a rate increase, stating, “The aggregate demand data (probably north of 7%…) and the inflation data point to the strong need to hike rates.”
Conversely, Mark Zandi, chief economist at Moody’s Analytics, expressed caution given a weakening economy, noting, “The Iran War is intensifying, real wages are falling, interest rates are rising, and the AI-fueled stock market looks shaky. Inflation is high, but there’s little sign it is becoming entrenched. This isn’t the time for more Fed rate hikes.”
Despite various economic pressures, GDP forecasts have risen to 2.4% for this year, with predictions staying above potential at 2.2% for 2027 and 2.05% for 2025. The likelihood of a U.S. recession within the next year is estimated at 26%, a decrease from 29% previously. The outlook for the S&P 500 remains steady at about 7,600 for this year, but has decreased to 8,033 for the next year compared to 8,274 in the prior survey.
Unemployment is projected to hold steady at 4.2% for the remainder of the year, rising to 4.4% in 2027. The Consumer Price Index is poised to decrease from 3.7% in September to 3.6% and is expected to fall further to 2.6% next year. Major risks highlighted include the ongoing Iran war and the potential bursting of the artificial-intelligence bubble.
Rob Morgan, senior vice president and market strategist at MOSAIC, advised that Fed Chair Warsh should advocate for addressing inflation by calling for an end to tariffs and the Iran conflict. With regards to high bond yields, survey participants indicated that high inflation, growth, debt issuance, and expectations of a higher Fed funds rate contribute to the phenomenon, with 50% attributing the issue to government debt.
Looking ahead to the forthcoming congressional elections, 63% of respondents believe there are significant risks due to legal challenges that might prolong uncertainty around congressional control. More than half of those surveyed expect Democratic control of both houses, while 40% foresee the Democrats taking the House but not the Senate. Most anticipate minimal changes to individual or corporate tax structures as a result of the elections, though 41% foresee higher deficits regardless of the party in control.
News Courtesy of CNBC
