April 30, 2013 at 10:29 AM ET
Wall Street now firmly believes that the Federal Reserve will keep its foot on the accelerator well into 2014, with 40 of 46 respondents to the April CNBC Fed Survey forecasting asset purchases by the central bank next year.
Meanwhile, as the sequester hits and the economy remains weak, market participants are having increasing doubts about whether cutting the deficit right now is the best idea. Support for immediate deficit reduction, once overwhelming in the survey, has fallen to a slim majority.
Respondents on average see the Fed buying $370 billion in assets in 2014 as part of the Fed's quantitative easing efforts to drive down interest rates. The average amount of expected purchases this year also increased to $936 billion from $917 billion in the March survey.
Survey respondents, who include economists, strategists and fund managers, pushed ahead any course reversal by the Fed by several months. The average month when the Fed is expected to begin to reduce its monthly purchases of assets is now February 2014, a month later than the last survey and two months later than the survey in January. A complete end to the program is now not expected until July 2014, two months later than the average for the March survey. The first fed funds rate hike is now seen in the second quarter of 2015, a quarter later than the prior survey.
John Kattar of Ardent Asset Advisors wrote in response to the survey, "The economy is struggling. The data have been weak, and continued growth in free reserves is indicative of risk aversion and lack of credit demand. I now believe an extension of QE into 2014 is somewhat more likely than any tapering before year end."
While they expect more QE, respondents appear to be having significant doubts about reductions in deficit spending. Now that the sequester is a reality, just 52 percent say the U.S. needs to urgently enact deficit reduction, down from 67 percent in March and 80 percent in January. Nearly 40 percent believe the U.S. has at least a couple of years to enact such a plan, up from 25 percent in March and just 16 percent in January.
The minority who want to increase spending cuts fell by more than half to 9 percent, while those who want to reduce the cuts rose a bit to 20 percent from 17 percent in March.
"The U.S. runs a risk of over tightening fiscal policy,'' wrote Jim Paulsen of Wells Capital Management, who points out the private sector is growing at a 4 percent annual rate. "The emergency to balance government is no longer an emergency. …One of the biggest risks to the economy right now is that government cutbacks become too extreme and cause the economy to stall. Let's stop the public cuts and allow the economy to grow at the speed at which 'private activity' is growing....which is about 3.5 percent."
Disagreement on the issue runs high, so high that there is even disagreement among those at related firms. Scott Wren of Wells Fargo Advisors writes, "We need to have a 10-year plan to dramatically reduce deficit spending. The sequester was way too small of an amount. We need to get serious."
In total, market respondents see government tax increases and spending cuts shaving just a half point off of growth this year. The growth outlook for 2013 and 2014 remains unchanged from March at 2.1 percent and 2.6 percent respectively.
(Read more: Bernanke Watch: Is He Eyeing the Exit?)
The group as a whole is pessimistic about the outlook for stocks, believing that the best gains are behind the market. The average participant forecasts about a 1 percent decline in the S&P between now and June and just a 1.3 percent increase from current levels by the end of the year. Curiously, stocks were chosen as the best investment by 73 percent of respondents, with 62 percent choosing real estate.
The outlook for gold and the reason for its recent decline defy consensus. A third of respondents say it will be higher a year from now, and a third say lower. The recent decline was attributed to a reduced outlook for inflation, gold selling by the Bank of Cyprus and the popping of a price bubble.
Despite the expectation of more QE, doubts about its effectiveness continue. Nearly two-thirds believe it will not help lower the unemployment rate, while respondents are divided over whether it can help lower mortgage rates, with 46 percent saying it will and 44 percent saying it won't. However, by a 54 percent to 35 percent margin, the group believes QE can help lower bond yields.
The biggest threat to the U.S. economy remains tax and regulatory policy, which is the top pick of 31 percent of respondents, but that's down from 42 percent in January. The European financial crisis was the top pick of 20 percent of the group, up from 10 percent in March. Slow job growth was the top pick of 20 percent of the group,