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The Federal Reserve is poised to cut interest rates this week, with a CNBC Fed Survey revealing that respondents anticipate a more gradual approach than what is currently reflected in market pricing. The survey, encompassing economists, fund managers, and strategists, indicates a strong consensus (84%) for a quarter percentage point rate cut, with a smaller proportion (16%) expecting a half-point decrease. This contrasts with the 65% probability of a half-point cut currently priced into fed futures markets. The divergence in expectations extends to the future, with survey respondents forecasting a year-end funds rate of 4.6% and 3.7% by the end of 2025, compared to 4.1% and 2.8% in the futures market.
Despite the uncertainty surrounding the Fed's actions, survey respondents appear more optimistic about the economic outlook than market participants, suggesting a greater belief in the possibility of a soft landing. Notably, 74% of respondents believe that the September rate cut will arrive in time to prevent a recession, while only 15% perceive it as too late. This overall sentiment translates to a 53% probability of a soft landing, aligning with the prevailing view since March. Conversely, the chance of a recession has risen to 36%, marking a five-point increase from its recent low in June but significantly lower than the 50% level observed for much of 2022 and 2023. Growth projections remain steady at 2% for this year and have been slightly adjusted to 1.7% for 2025, indicating a trajectory that remains near or above potential levels, suggesting a continued expansion rather than a recessionary trajectory. Experts like Michael Englund of Action Economics highlight the strength of the economy in 2024, providing the Fed with ample opportunity to implement rate cuts at a measured pace. Others, such as Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, emphasize the upcoming Fed cuts as a 'mid-cycle correction' trend, drawing parallels to similar scenarios in 1995, 1997, and 2019.
While the outlook is generally positive, the survey does acknowledge the presence of economic risks. Forecasts for the unemployment rate have been nudged higher, with expectations of 4.4% and 4.5% for this year and next, respectively, representing a modest increase from the previous survey. This suggests a potential for some increase in joblessness as the economy navigates the impact of rate cuts and other economic factors. The prevailing sentiment, however, suggests that the Fed's upcoming rate cuts are more likely to usher in a period of gradual economic adjustment rather than a recessionary downturn, creating a more favorable environment for continued growth in the near term.
Source: Fed to cut rates by a quarter point with a soft landing expected, according to CNBC Fed Survey