FED SURVEY

December 11, 2012

These survey results represent the opinions 48 of the nations top money managers, investment strategists, and professional economists. They responded to CNBCs invitation to participate in our online survey. Their responses were collected on December 6-7, 2012. 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. Do you expect the Federal Reserve to replace the expiring Operation Twist with outright assets purchases?
100% 90% 80% 70% 60% 50% 40% 30%

88%

20%
10% 0%

8%

4%
Don't know/unsure

Yes

No

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December 11, 2012 For those who answered yes to question #1: What specifically will the Fed purchase to replace Operation Twist?
60%

50%

50% 48%

40%

30%

20%

10%

2%
0% MBS Only Treasuries Only Mix of Treasuries and MBS

0%
Other

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2. In January, how much do you expect total monthly asset purchases to be from the Fed, including the new QE program announced in September and taking into account whatever amount, if any, that you believe the Fed will add to replace Operation Twist?
35%

30%

25%

20%

15%

10%

5%

0%

Billlions of dollars

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3. By the end of December 2013, what is the total amount of additional asset purchases the Federal Reserve will have made?
30%

25%

20%

15%

10%

5%

0%

Billlions of dollars

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4. At what unemployment rate will the Fed halt its asset purchases?
35%

30%

25%

Average: 6.5%

20%

15%

10%

5%

0%

6% of respondents selected Fed purchases will not react to the unemployment rate

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December 11, 2012 5. At what inflation rate will the Fed halt its asset purchases?
40%

35%

30%

Average: 3.4%

25%

20%

15%

10%

5%

0%

20% of respondents selected Fed purchases will not react to the inflation rate

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December 11, 2012

6. Should the Fed use explicit economic targets to trigger monetary policy?
September 12, 2012
70%

December 11, 2012

60%

60%

50%

49% 45%

40%

32%
30%

20%

10%

9%

6%

0% Yes No Don't know/unsure

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December 11, 2012 7. If the Fed does choose to use economic targets, which of the following do you favor? (You may select more than one.)
September 12, 2012
80%

December 11, 2012

75%

70%

60%

55%

50%

43%
40%

40% 36%

32%
30%

20%

10%

9%

11%

0% Inflation Other responses: Broad swath of employment indicators Equity markets Money supply It should definitely not use economic targets Labor force participation rate Unemployment rate Nominal GDP Other

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December 11, 2012 8. In the Feds policy statement after its December 11-12 meeting, the FOMCs low-rate calendar guidance will:
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

79%

9%

4%

0%

0%

4%

4%

Comments on this question: John Augustine, Fifth Third Asset Management: Sometime during 2013 Fed drops calendar guidance and goes to economic target guidance. Tony Crescenzi, Pimco: The Fed needs more time to study how to replace its forward guidance. The Fed will need to anchor inflation expectations if it is to put more focus on employment, which is likely. John Donaldson, Haverford Trust Co.: Ultimately, the mid-2015 guidance will prove to be too long as the first policy move will be earlier.

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Lee Hoskins, Pacific Research Institute: The Fed should drop date guidance and stick with an explicit inflation target with guidance as to how changes in the inflation rate will prompt policy actions. Over time the Fed only determines the inflation rate and has no control over real variables such as employment or real GDP. How many times does the Fed need to run the QE experiment before it becomes obvious that it fails to produce employment or real GDP growth? QE 5,6,7? Hugh Johnson, Hugh Johnson Advisors: Implicit goals of Federal Reserve policy would seem to include: (a) Maintaining both short and longer-term interest rates (including mortgage rates) at levels that are "low and attractive to borrowers" (b) Preserve some downward pressure on the dollar to stimulate exports to offset weakness in exports to Europe (c) Stimulate ongoing recovery in housing and housing prices to improve the asset side of household balance sheets and, as result, further the deleveraging process (d) Help stock prices for same reason as c This policy is accommodative and responsive to underlying economic conditions (which remain anemic) and is arguably humane. The unfortunate aspect about the current state of affairs is that tax and spending policy is not accommodative, responsive to underlying economic conditions, or humane. Reducing deficits is important, but must be secondary until the excess (debt) of the financial crisis is eliminated or reduced. Deficits are and will continue to come down as a percentage of GDP and they should come down somewhat "harder" so that debt as percentage of GDP reverses course downward. But this requires only a "nudge" to tax and spending policy...not an ax. Review 1937-1938. Alan Kral, Trevor Stewart Burton & Jacobsen: Term will be indefinite Joseph LaVorgna, Deutsche Bank: Sometime early next year, the Fed will agree on a set of economic variables that will provide thresholds for the removal of policy accommodation. Mark Luschini, Janney Montgomery Scott: The Fed either institutes or makes strong reference to the intention to move from a date-dependent approach to a state-dependent approach. Drew Matus, UBS Investment Research: QE is the roach motel of policy: once a central bank checks in, they can never check out. Ward McCarthy, Jefferies: They may link this to economic projections. Joel Naroff, Naroff Economic Advisors: Since the fiscal cliff issue will not be resolved by then, the Fed cannot change its outlook. Depending upon what happens with the discussions, the Fed could modify things at its January meeting. Chris Rupkey, Bank of Tokyo-Mitsubishi: Over time the Fed has wrecked the money markets by pushing rates to zero four long years ago. Now with QE and forward guidance they are trying to bring down long-term rates to zero as well. They wrecked the money market and now their actions are wrecking the bond market. This is the longest Fed easing during an economic expansion in history. As long as they keep doing this it tells the public the economy is still not all right in their view. This policy is starting to look like a mistake.

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Hank Smith, Haverford Investments: The so called "grand compromise" of tax and entitlement reform is the key fiscal policy if done right that will allow the Fed to start the unwinding process. Diane Swonk, Mesirow Financial: Changes to communications is an evolutionary process, and we still don't have consensus on how to convey more economic targets. Clare Zempel, Zempel Strategic: Fed should replace the low-rate promise with a pledge to do whatever it takes to raise nominal GDP growth to 5.5% on a sustained year-over-year basis.

9. Do you believe further quantitative easing can help lower the unemployment rate?
September 12, 2012
70%

December 11, 2012

60%

59% 59%

50%

40%

36%

37%

30%

20%

10%

5%

4%

0% Yes No Don't know/unsure

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December 11, 2012 Do you believe further quantitative easing can help mortgage rates?
70%

60%

59%

50%

40%

33%
30%

20%

10%

9%

0% Yes No Don't know/unsure

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Do you believe further quantitative easing can help lower bond yields?
70%

60%

58%

50%

40%

30%

30%

20%

13%
10%

0% Yes No Don't know/unsure

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December 11, 2012 10. Would further purchases of government or mortgage backed securities by the Fed impair market pricing and overall functioning?
September 12, 2012
70%

December 11, 2012

60%

59% 52%

50%

43%
40%

30%

28%

20%

13%
10%

5%

0% Yes No Don't know/unsure

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December 11, 2012 11. Would further QE cause inflation?

50%

46%
45%

40%

35%

35%

30%

25%

20%

15%

11%
10%

9%

5%

0% Yes No It already is Don't know/unsure

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December 11, 2012 12. Do you believe the U.S. will go over the fiscal cliff?
50%

46%
45%

41%
40%

35%

30%

25%

20%

15%

13%

10%

5%

0% Yes No Don't know/unsure

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December 11, 2012 13. If the U.S. does go over the fiscal cliff, do you believe it will do so:
45%

43%

40%

35%

30%

28%

25%

20%

19%

15%

10%

6%
5%

2%

2%
For only a few months For only a few weeks For only a few days Don't know/unsure

0% Permanently For most of 2013

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December 11, 2012 14. What would be the impact on GDP if the U.S. goes over the fiscal cliff?
2013 GDP
30%

2014 GDP

Averages:
25%

2013 GDP: -1.61%

20%

2014 GDP: -0.61%

15%

10%

5%

0%

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December 11, 2012 15. Where do you expect the S&P 500 stock index will be on ?
Jan 23 March 16 April 24 July 31 Sept 12 Dec 11

1497 1480

1453 1436 1417 1400 1396

1451

1387

December 31, 2012

June 30, 2013

July 31 was the first survey in which we asked for a June 30, 2013 forecast.

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December 11, 2012 16. What do you expect the yield on the 10-year Treasury note will be on ?
Jan 23 March 16 April 24 July 31 Sept 12 Dec 11

2.59% 2.52% 2.40%

2.06% 1.98% 1.78% 1.69%

1.90%

1.64%

December 31, 2012

June 30, 2013

July 31 was the first survey in which we asked for a June 30, 2013 forecast.

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December 11, 2012 17. What is your forecast for the year-over-year percentage change in real U.S. GDP?
July 20, 2011 January 23, 2012 Sept 12 Aug 11 March 16 Dec 11 Sept 19 April 24 Oct 31 July 31

2012

+2.85% +2.47% +2.24% +2.37% +2.45% +2.46% +2.39% +1.93% +2.06% +2.06%

2013

+2.59% +2.74% +2.55% +2.26% +2.21% +1.91%

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December 11, 2012 18. When do you think the FOMC will first increase the fed funds rate?
April 24 50% 45% 40% 35% 30% 25% 20% July 31 Sept 12 Dec 11

15%
10% 5% 0%
April 24 July 31 Sept 12 Dec 11

2012 4% 0% 0% 0%

2013 34% 22% 16% 4%

2014 45% 28% 23% 32%

2015 13% 37% 34% 38%

2016 11% 18% 17%

2017

Don't Know 4% 2% 8%

6%

9%

Notes: Responses for individual quarters are combined by year. In the July 31 survey, the choice of 2015 or later was replaced with choices for each quarter and 2016 or later was added. In the December 11 survey, the choice of 2016 or later was replaced with choices for each quarter and 2017 or later was added.

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19. When do you think the Federal Reserve will make its first planned decrease in the size of its balance sheet?
April 24 50% 45% July 31 Sept 12 Dec 11

40%
35% 30% 25% 20% 15% 10% 5% 0%
April 24 July 31 Sept 12 Dec 11

2012 8% 0% 0% 0%

2013 45% 27% 17% 2%

2014 14% 38% 28% 30%

2015 28% 18% 26% 35%

2016 16% 17% 7%

2017

Don't Know 6% 2% 13%

11%

15%

Notes: Responses for individual quarters are combined by year. In the July 31 survey, the choice of 2015 or later was replaced with choices for each quarter and 2016 or later was added. In the December 11 survey, the choice of 2016 or later was replaced with choices for each quarter and 2017 or later was added.

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20. Where do you expect the fed funds target rate will be on ?
Jan 23
0.0%

March 16
0.1%

April 24
0.2%

July 31
0.3%

Sept 12
0.4%

Dec 11
0.5%

0.41% 0.42%
June 30 2013

0.27% 0.20% 0.14% 0.16%

Dec 31 2013

0.33% 0.27% 0.21%

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December 11, 2012 21. In the next 12 months, what percent probability do you place on the U.S. entering recession? (0%=No chance of recession, 100%=Certainty of recession)
40%

35%

36.1% 34.0%

30%

28.5% 25.5% 20.3% 25.9% 26.0% 20.6%

25%

20%

19.1%
15%

10%

5%

0% Aug 11, Sept 19 Oct 31 Jan 23, March April 24 July 31 Sept 12 Dec 11 2011 2012 16

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December 11, 2012 22. What is the single biggest threat facing the U.S. economic recovery?
45%
40% 35% 30% 25% 20% 15% 10% 5% 0% European recession/financial crisis Tax/regulatory policies Slow job growth High gasoline prices Overall inflation Deflation "Fiscal Cliff" Don't know/unsure Other:
Other responses: Geopolitical shock Newspaper stories exaggerating the risks that the economy faces Excessive deficit reduction

March 16

April 24

July 31

Sept 12

Dec 11

17%
36% 4% 26% 4%

37%
27% 8% 8% 4%

30%
16% 7% 0% 0% 5% 41%

24%
11% 15% 0% 0% 2% 39% 2% 7%

11%
33% 9% 0% 2% 0% 35% 2% 9%

2% 11%

0% 17%

0% 2%

Radical federal policy shift

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December 11, 2012 What is your primary area of interest?

Currencies 0%

Other 15%

Fixed Income 15% Equities 17%

Economics 53%

Comments: John Augustine, Fifth Third Asset Management: There will be a small tax agreement made prior to 12/31, but not a spending agreement. The White House needs a tax agreement as the middle class would be negatively impacted the most by tax expirations, not the wealthy (outside of the estate tax). Tony Crescenzi, PIMCO: At the end of the day, the fiscal cliff is a small issue when considering the longer-term budget challenges facing the United States, which is on a course to see its debts rise significantly in the years ahead owing to sharp growth rates in the size of government spending programs. The medium to long-term budget problems of the United States are far more important to the ultimate destination of markets than is the fiscal cliff. John Donaldson, Haverford Trust Co.: Allowing the economy to
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December 11, 2012 "go over the cliff" would be extremely reckless. The possibility of unintended consequences is almost limitless. Kevin Giddis, Raymond James/Morgan Keegan: The fiscal cliff conversation has edged its way to the "head of the class" when considering the possibility of a new recession. If it can be avoided, then economic growth returns to just "being hard" vs. "nearly impossible." Dan Greenhaus, BTIG: While it may not be the primary threat, the fiscal cliff is certainly the paramount immediate threat. If the cliff is triggered, and the cuts/tax increases remain in place for several weeks or worse, several months, its hard to construct a scenario where the U.S. economy is not in recession. Recovering from that recession is not as simple as "fixing" the cliff's issues. The U.S. economy is not a light switch. Lee Hoskins, Pacific Research Institute: The Fed has laudable intentions but we all know what road they pave. Bubbles, inflation, and misallocation of capital are the likely outcome of its misguided policies. Hugh Johnson, Hugh Johnson Advisors: Essentially, the outlook remains positive for the economy, profits, and stock prices for 2013 and 2014 assuming U.S. tax and spending policy does not become "too aggressive" as it did in 1937-1938. This requires patience (deficits are declining as percentage of GDP, with modest increases in tax revenues and modest reductions in spending debt will begin to decline as percentage of GDP and will not reach the 90 percent "danger zone") and sensible tax and spending decisions. The outlook for 2013 and 2014 depends on it (as by now we all suspect). John Kattar, Ardent Asset Advisors: ZIRP and QE have become such a fixed part of investor expectations that it is difficult to see how or when the Fed could unwind these policies without major
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December 11, 2012 economic or market dislocations. The Fed has stayed too long at the party. Barry Knapp, Barclays PLC: There is an inordinate amount of focus on the timing of the deal and while important, we believe the larger issue is whether the ultimate deal that emerges avoids the European approach of too much reliance on taxation and no real structural change to debt sustainability. David Kotok, Cumberland Advisors: There is little margin for shocks to the system. That is why Middle East and oil shocks are very high risk. U.S. and global recovery is very fragile. Joseph LaVorgna, Deutsche Bank: Monetary policy is dampening the "animal spirits" of the business cycles; and the long-term effects of QE could be very detrimental to economic growth and financial stability. Guy LeBas, Janney Montgomery Scott: A more appropriate term would be the "fiscal whiff..." In seriousness, however, our country faces one of relatively few decision points as to whether we value economic growth today or a sustainable budget path and better growth tomorrow. That decision is largely a moral one, not an economic one. The fiscal cliff is brought about by this unavoidable conflict. "Fixing" the fiscal cliff without long term reforms is just as risky--if not more so--than "going over." John Lonski, Moody's: As far as the perceived risk of going over the "fiscal cliff" is concerned, improved market sentiment is at odds with sharply lower consumer sentiment and anecdotal evidence of diminished business confidence. Also, recent financial market rallies may lessen the perceived urgency among policymakers of resolving "fiscal cliff" issues prior to 1/1/2013. Drew Matus, UBS Investment Research: QE is the roach motel
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December 11, 2012 of policy: once a central bank checks in, they can never check out. Ward McCarthy, Jefferies: The U.S. economy could grow at 3 percent to 3.5 percent in short order if the politicians could get the budget right. Rob Morgan, Fulcrum Securities: The Fed should be wary of using economic targets to guide policy. Changes to policy take months to ripple through the economy so using some economic targets to guide policy is somewhat like driving a car using only the rear-view mirror. Chad Morganlander, Stifel Nicolaus (Washington Crossing Advisors): Regardless of what the Federal Reserve does the global economy in 2013 will look like 2012. We expect the U.S. economy will grow at a sluggish pace of 1-2 percent. The European economy will contract at -1 percent and global growth expectations will continue to be reduced. We are advising clients to stay balanced and move up the quality spectrum on equities and fixed income investments. Joel Naroff, Naroff Economic Advisors: A reasonable resolution to the fiscal cliff could lead to much better growth in 2013 and the Fed ending its aggressive easing program before the end of 2014. John Roberts, Hilliard Lyons: Our projections are based on a negotiated agreement on the fiscal cliff that increases rates slightly at the top end, reduces the ability to take some deductions across the board, puts entitlements on a more sustainable footing, and cuts some government spending. Should these goals not be met, our expectations will be overly optimistic. We continue to believe that equities are solidly undervalued versus competing investments, but political/governmental considerations are impacting equity pricing more than fundamentals at this time.

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December 11, 2012 Chris Rupkey, Bank of Tokyo-Mitsubishi: I was just kidding. I think we are all doomed. Fiscal Cliff pales in importance against the end of the world forecast by the Mayan calendar. Get your affairs in order, this ship is going down. Hank Smith, Haverford Investments: If we fall over the fiscal cliff the equity market (the new vigilante) will sell off dramatically which will force the hand of Washington to quickly do tax reform and then entitlement reform. 2013 is the year certainty replaces uncertainty resulting in an unleashing of pent up demand causing GDP growth to accelerate. Diane Swonk, Mesirow Financial: Everything hinges on fiscal policy: If we avert cliff and move forward on credible deficit reduction, 2013 could be a pivotal year on the upside; if we fail, we lose what little influence we have in the world politically and economically. We will have squandered what's left of our legacy by slitting our own economic throats. Scott Wren, Wells Fargo Advisors: In 2013, I think the market is going to start to demand that Washington begins to address our longer term fiscal problems. I think Congress will likely begin to gravitate toward the Simpson-Bowles plan or something very similar...it was bipartisan and a result of the President's commission. While I disagree with parts of this proposal, it is a good starting point...right now we just need a plan. Almost any plan. Clare Zempel, Zempel Strategic: Monetary policy is more potent than fiscal and could offset any fiscal cliff weakness. The Fed should adopt a "market monetarist" (nominal GDP targeting) policy to lift employment, because that is proper, and because it may help preclude harmful radical political-economic shifts.

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