Foreign media surveys say aggressive rate hikes by the Fed will lead to a recession!

According to a CNBC Fed survey in May, the Fed is expected to sharply raise interest rates and cut its balance sheet over the next 16 months, a process that most respondents believe will end in a recession.

The Fed raised interest rates by half a percentage point (50 basis points) for the first time in 22 years, with another hike in June. After that, 30 respondents differed from what the fed funds futures market was expecting, with most betting on a 25 basis point hike.

But they still see interest rates rising sharply. Respondents, including economists, fund managers and strategists, expect the funds rate to hit 2.25% by the end of the year, before eventually rising to 3.08% by August 2023. The terminal rate was 72 basis points higher than the March survey and was where it was three months ago. After that, rates will fall, ending 2023 at 2.6%.

The Fed is expected to shed $2.7 trillion from its nearly $9 trillion balance sheet over the next two years and five months, faster than previously expected. Fifty-seven percent believe the Fed will eventually sell assets rather than just let its balance sheet run off.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote: “I don’t think the market realizes that [quantitative tightening] is very aggressive and that this double tightening would be disruptive. Of course, the market has priced in many rate hikes, but we The economic impact of the most aggressive monetary tightening cycle of the post-Volcker era has not yet been digested.”

The rapid pace of policy tightening and the stubbornness of inflation have led most to believe that the Fed will not achieve a soft landing. When asked whether efforts to reduce inflation to 2% would lead to a recession, 57% said it would, 33% said it could be avoided and 10% said they didn't know. August 2023 is the average starting month for those who believe a recession is imminent, with 53% believing it will be mild and 43% believing it will be mild.

The probability of a U.S. recession in the next 12 months rose slightly to 35% from 33% in the previous survey. The probability of a recession in Europe next year has also risen by two percentage points, now at 53%. The economic consequences of the war in Ukraine hit Europe much harder.

In terms of inflation, 74% of respondents believe inflation has peaked, up from 7% in the March survey, but most believe the Fed will not successfully reach its 2% target until 2024. The consumer price index is expected to end at 5.6% at the end of the year, up 0.4 percentage points from the previous survey, and at 3.3% at the end of 2023, unchanged from the March survey.

Growth forecasts for the U.S. have been sharply revised down this year, with U.S. GDP now forecast to average 2.2% in 2022, down 70 basis points from the March forecast, and 2024 to average 2%, down 30 basis points.