According to the CNBC Fed Survey, the Fed will cut interest rates less often and introduce them later than the market hopes

• Only 9% of respondents to the CNBC Fed survey expect the central bank to cut interest rates in March.
• Futures markets give a 37% chance of a March cut.
• Futures markets have priced in between five and six rate cuts this year, while Fed survey respondents on average expect just over three.

Respondents to the CNBC Fed survey see less interest rate cuts than the market's aggressive outlook, with the central bank instituting them later in the year than traders are currently hoping.

Only 9% expect the Federal Reserve to cut interest rates in March. 50 percent expect a cut in May and only in June does a majority of 70 percent predict a cut in interest rates. The futures markets, on the other hand, estimate a rate cut in March with a probability of 37% and in May with a probability of around 84%. And while futures markets have priced in between five and six rate cuts this year, survey participants see just over three on average.

“There is little reason to expect the economy to slow significantly, so the Fed is unlikely to risk the inflation gains it made through early easing,” Joel Naroff, president of Naroff Economics, wrote in response to the survey .

The Fed's interest rate decision will be made on Wednesday at 2:00 p.m. ET. This will be followed by a news conference from Fed Chairman Jerome Powell, where traders will examine his words for clues as to when the central bank might begin taking action.

It's fairly typical for this group of Fed watchers to be more familiar with the central bank's outlook than the market. The question remains who has the right and how important it is. By 2025, the market, survey and Fed forecasts converge on a key interest rate between 3.3% and 3.6%. The debate now is about how quickly the Fed gets there.

“(Fed Chairman Jay) Powell will buck the market on what he's pricing in rate cuts, but still limit himself to a few,” predicts Peter Boockvar of Bleakley Financial Group. “(It's a) difficult balance because markets hear what they want to hear.”

While respondents predict a cautious Fed, overall they think it should be more aggressive: 56% say the bigger risk is that the Fed cuts interest rates too late, while 44% say the risk comes too soon.

The 25 respondents, including economists, strategists and fund managers, were less agreed on the risks of reducing the Fed's $7.6 trillion balance sheet. They expect the balance sheet reduction – known as quantitative tightening – to end in November. The Fed is expected to cut its total reserves by another $1 trillion, to $6.6 trillion, and reduce bank reserves to $3 trillion from the current level of around $3.5 trillion.

At that level, bank reserves would be nearly double what they were before the Fed expanded its balance sheet to provide greater stimulus to the economy. The central bank has said it wants to stop QT just above the level of what it calls “sufficient reserves.” Thirty-six percent of respondents say the greater risk is the Fed keeping its balance sheet too large, compared with 16 percent who say the risk is keeping its balance sheet too small. But 32% say neither poses a major risk and 12% say both risks are the same.

The CNBC poll shows forecasters still expect a slowdown, but it won't be nearly as severe as they incorrectly predicted a year ago. Last year, respondents predicted that growth would slow to below 1% and unemployment would rise, at least in the first half of the year. Growth was over 3% and unemployment has barely changed.

The forecast for average gross domestic product this year is for a decline in GDP to 1.3%, an increase in unemployment by six tenths of a point to 4.3% and an increase in the overall consumer price index at the end of the year at 2.7%. But behind these averages lie different views on the outlook.

“With the yield curve inverted since November 2022, leading economic indicators falling for 21 consecutive months, and M2 money supply declining year-on-year, I simply cannot bring myself to abandon my recession forecast,” said Robert Fry, chief economist at Robert Fry Economics LLC. “But it turns out that the U.S. economy is far less sensitive to interest rates than it used to be for a variety of reasons.”

But Mark Zandi of Moody's Analytics writes: “It's hard not to be more optimistic about the economy's prospects. And while there are downside risks, including the possibility of various geopolitical flashpoints boiling over and a contentious presidential election looming, they are perceived as less and less threatening.”

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