According to the latest CNBC Fed Survey, forecasters have raised their outlooks for a recession and boosted their inflation projection as the Federal Reserve faces the quandary of fast-rising prices and greater uncertainty from Russia.
The probability of a recession in the U.S. was raised to 33% in the next 12 months. There is a 50% chance of a recession in Europe.
Respondents debated if the recent surge in commodity prices would prompt the Fed to hike rates faster because it adds to inflation or if it would cause the Fed to raise rates less because they reduce growth.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott wrote that the tax impact of higher commodities prices is likely to slow the pace of hiking.
I expect six quarter-point rate hikes from the Fed in 2022, wrote Rob Morgan, senior vice president at Mosaic. The Fed might be pressured into a 50-basis point hike in May if the consumer price index reaches 9% in the March or April report.
The 33 respondents, who include fund managers, strategists and economists, predict the Fed will raise rates an average of four times this year and two times by the end of the year. The central bank is expected to hike five to seven times this year.
The Fed's neutral rate is seen ending the rate hike cycle at a peak funds rate of 2.4%. The central bank may have to raise rates above neutral in order to control inflation.
The consumer price index is expected to peak at 8.5% in March, but then decline to a still high 5.2% by the end of the year. The February survey had a percentage point higher than that. The rate of inflation is expected to rise 3.3% in the year 2023, still above the Fed's target.
Peter Boockvar, chief investment officer of Bleakley Advisory Group, wrote that the Fed might be on the verge of raising rates at the same time as GDP is falling.
A recession is seen as a greater possibility than in February, but it is not the base case for most respondents. The average GDP forecast for this year is slightly above-trend. The forecast for GDP in the next survey was 2.4%, down from the last survey's 2.5%.
Inflation forecasts had already been high for this year, but Russia's invasion of Ukraine has made the situation worse, with nearly 90 percent saying they boosted their 2022, inflation outlook because of the war. They increased their inflation forecast by an average of 0.8 percentage point. Sixty percent of respondents said they shaved the GDP forecasts because of the conflict.
The outlook for stocks is relatively bullish. The outlook for equities has been lowered by the respondents, but they still think that stocks are overvalued compared to the outlook for earnings and growth. The least bearish respondents have been since the Covid epidemic began.
The CNBC Risk/Reward ratio improved to -9 from -14, meaning a negative correction is less likely.
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