CNBC Fed Survey –December 16, 2014 Page 1 of 32FED SURVEY December 16, 2014These survey results represent the opinions of 38 of the nation’s top money managers, investment strategists, and professional economists. They responded to CNBC’s invitation to participate in o ur online s urvey. Their responses were collected on December 11-13, 2014. Participants were not required to answer every question. Results are also shown for identical questions in earlier surveys. This is not intended to be a scientific poll and its results should not be extrapolated beyond those who did accept our invitation. 1.By how much do you believe the Fed will, on net, increase or decrease the size of its balance sheet in 2015 and 2 016? -$104 -$146 $24 $60 -$83 -$54 -$25 -$171 -$200 -$150 -$100 -$50 $0 $50 $100 Mar 18 Apr 28 Jul 29 Aug 20 Sep 16 Oct 28 Dec 16 B i l l i o n s Survey Dates 2015 2016 2016 Forecast
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3. What is the probability the Fed will begin a new QE program in
the next year/two years? (0%=No chance of new QE, 100%=Certainof new QE)
Note: In previous surveys, this question was: “What is the probability the Fed will begin a new QEprogram in the 12/24 months after it concludes the current QE program?”
Robert Brusca, Fact and Opinion Economics: Inflation is lower
and policy is tighter than the Fed and policymakers realize. The realbiggest risk to the US economy is the ongoing diversion of resourcesto China and failure to implement real free trade rules for the globaleconomy.
Thomas Costerg, Standard Chartered Bank: The FOMC meetingis likely to deliver a hawkish outcome. But we remain cool-headedabout our rate-tightening scenario. We continue to see September2015 as the likely timing for the first rate hike. We also think the
rate plateau will be 2.0%, much lower than the 3.75% the Fedexpects. We think the Fed under-estimates the likely decline in coreinflation in coming months. Inflation is likely to remain low in comingyears. As an aside, note that the 2015 FOMC is turning more dovish
Tony Crescenzi, PIMCO: There are three escapes the Fed mustmake in order to declare its mission a success:
1. Escape from a liquidity trap: Get banks to lend
2. Escape from quantitative easing: Stop the bond buying program3. Escape from the zero bound: Hike the policy rate above zero
“If all goes according to our forecast and the U.S. economy continues
to make progress toward the Fed’s dual mandate goals of maximumsustainable employment and 2 percent inflation, the Federal Reservewill likely begin to raise its federal funds rate target off the zero
bound sometime next year.” William Dudley, President of theFederal Reserve Bank of New York
Heed Dudley’s words. The timeline for the Fed’s first rate hike willlikely hold. That said; we suggest not getting too wrapped up in the
exact timing of the Fed’s first move. Focus instead on the speed andmagnitude of future hikes. With inflation low and wage growthweak, the Fed can be afford to be patient. A pickup in wage growthin 2015 won’t likely change matters, either. Can anyone imagine
Janet Yellen saying to Americans if wages do accelerate: “For sixyears you hurt through 2% annual wage growth, a full percentagepoint below normal, but over the past six months you’ve all done
pretty well, so we at the Fed are going to raise rates aggressively toput a stop to it!” No way! More likely the Fed lets the U.S. economy “run hot” a bit, as William Dudley recently said, by keeping its policyrate below where it normally would when the unemployment rate
has fallen.
The Fed is leery of the risks of moving too soon. It recognizes thedifficulties of resuscitating growth once it falters. In contrast,
inflation worries are more readily doused if they surface. In eithercase, the Fed can’t wait indefinitely and will likely feel compelled toget started around the middle of 2015 and pivot somewhat from thepredominant risk-management focus of recent years, which has
The Fed simply doesn’t know at what point inflation pressures willkick in – it is probing for the answer. Yet, the more the jobless rate
falls, the more the Fed will have to tend to the possibility thatinf lation may accelerate. While this means escaping from zero, don’texpect the rate rocket to go too far. The Fed itself sees its policy ratestaying very low for years to come, projecting in its quarterly
Summary of Economic Projections a policy rate of around 2.5% atthe end of 2016, even as it projects success in reaching its goals onemployment and inflation.
This is striking considering that the Fed normally maintains a neutralpolicy stance when it believes economic conditions are ideal, whichto the Fed translates to a policy rate of 3.75%. Janet Yellen and theFed obviously want to keep their thrusters open so that Americans
can get fatter paychecks, which have been moving in slow motion,like a man walking on the moon.
PIMCO believes that the neutral policy rate is far lower than the Fed
believes, at around 2%. There are many potent reasons for this (seeRich Clarida’s, “Navigating the New Neutral”). Here are five providedby the Fed in the minutes to its March 19th, 2014 meeting:
1. Higher precautionary savings by U.S. households2. Higher global savings3. Demographics
4. Slower growth in potential output5. Restrained credit growth
These potent secular headwinds are important for investors to stay
mindful of when constructing their investment portfolios. Be leery ofgetting caught up in the very convincing optimistic cyclical outlookand the tendency to over-extrapolate the longer-term outlook fromshorter-term trends.
As just mentioned, we suggest a focus on the big picture, bycentering portfolio construction on the speed and magnitude of
future rate hikes. This means constructing portfolios that are likely tobenefit from low policy rates not only in the United States, but also
in Europe, where markets are priced for both the European CentralBank and the Bank of Japan to keep their policy rates under 1% forthe rest of the decade.
Investors in such a climate are likely to continue reaching for yieldand higher returns by reaching outward along the risk spectrumshown below. We expect these assets to remain well supported for
some time.
All that said, asset prices don’t move in a straight line and there areshort-term considerations to heed, not the least of which is thelaunch of the Fed’s rate hike cycle, which could well be disruptive to
the many assets that have taken flight from the Fed’s monetary fuel.
Investors can be opportunistic if they stay mindful of the destinationfor rates in the U.S. and globally when market sentiment inevitably
occasionally sours against assets that are likely to benefit fromtoday’s era of low interest rates.
So will the Fed achieve its great escape? Probably. Yet like othercentral banks, it is not likely going very far, so it will feel like it neverleft.
John Donaldson, Haverford Trust Co.: Essentially every inhibitionto the Fed removing the "considerable time" phrase has been
removed. The ability to make that change right now has beenhanded to them on the proverbial silver platter. Stock market at fair
valuation, check. Employment improving, check. Bond market stable,check. Every single borrower who can has refinanced their debt,check. Global rates low, check. Dollar strengthening, check.
significant risks for the European economy and European inflation.These risks are quite likely to be transmitted to the US and
elsewhere although they are unlikely to derail the current US bullstock market and economic expansion. Concerns are clearly
intensifying...justifiably.
John Kattar, Ardent Asset Advisors: The Fed needs to be morefocused on the deflationary risk of collapsing oil prices and a surging
dollar than on the better employment numbers now. At the margin,I think this makes them more dovish.
Subodh Kumar, Subodh Kumar & Associates: Marketexpectations have lingered of a brave new world driven byquantitative ease. Rather than being proactive currently, marketsappear to be reactively jousting. The reality even for central banksand certainly Wall Street is the interaction between momentum,
value and geopolitics.
Geopolitics cannot be solely laid to rest on Islamic fundamentalistterrorism but includes border tensions and income distribution from
the Levant to Europe to Asia. The volatility for the unexpected islikely to rise, including currency.
We favor value over momentum as the next likely change for whichto prepare portfolios now. The risks we see lie in Europeanweakness and geopolitical tensions with the upside potential drivenby better Asian growth, including Japan, developing from late 2015.
Still, S&P 500 operating and global earnings are likely to be less than
year-end 2014 consensus. In fixed income, we favor medium-termcorporate and sovereign issues denominated in North American
currencies and in Sterling. In equities, diversification dominated bygeographic dispersion is likely to be a lesser factor than quality infinancial strength, ongoing cash flow and last but not least seasonedoperational management.
For frugality over aspiration globally different from the last cycle, weunderweight the consumer and instead overweight industrials for
infrastructure and geopolitics-linked defense spending. Likely insustained restructuring, we still favor Finance and Information
Technology with advantage for early movers embracing deepchange.
Rob Morgan, V2V Associates: The Fed will face a bit of a
conundrum in 2015 - a strengthening economy, but inflation that isrunning below the desired band.
Joel Naroff, Naroff Economic Advisors: It is all coming togetherand the Fed will use the stronger economy as the cover to raise ratessooner than expected.
Lynn Reaser, Point Loma Nazarene University: It is now high
time to remove the phrase "considerable time" from the Fed'sstatement. The impact of plunging oil prices on growth will be muchstronger than any feed through to lower core inflation.
John Ryding, RDQ Economics: The Fed has to begin to set thestage for rate hikes in 2015 at next week's FOMC meeting.Expecting "considerable time" to be replaced by language that says
"can afford to be patient in removing accommodation"
Allen Sinai, Decision Economics: The U.S. economy looks terrificand a challenge for the Federal Reserve will be how to balance the
achievement of full employment but not price stability in choosingthe path for the federal funds rate.
Hank Smith, Haverford Investments: The Fed has done an
excellent job over the past 6 years. With some help from better fiscalpolicy, the Fed should do a good job getting back to neutral/normal.
Diane Swonk, Mesirow Financial: The primary responsibility of
any central bank is price stability; too low inflation could be the Fed'sgreatest optical to raising rates next year. The Fed has much to lose
by raising rates prematurely. Their powder is dry if they have toraise rates only to return to the zero bound.
Peter Tanous, Lynx Investment Advisory: Looking for higherGDP growth next year--a Spring Surprise
Scott Wren, Wells Fargo Advisors: Lower oil prices, just likelower interest rates, are not always a good thing. Sure, consumershave more money in their pockets to spend and some industries see
their costs lowered. On the other side of the coin, however, is theconcern over why oil prices and interest rates are low. I would muchrather see oil prices rising along with interest rates as a result ofglobal economic growth accelerating at an above average pace....lowoil prices and low interest rates tell me that the markets do not
believe that will be the case any time soon. Unfortunately, I agree.
Mark Zandi, Moody's Analytics: The Federal Reserve will stickwith the script it put in place over a year ago, namely to begin
raising short-term rates in June 2015 and normalizing rates by theend of 2017.