FED SURVEY

July 31, 2012

These survey results represent the opinions of 50 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 July 27-28, 2012, after the U.S. Q2 GDP report was released. 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. Will there be another Federal Reserve quantitative easing program in the next year (12 months)?
July 20, 2011 October 31, 2011 April 24, 2012 August 11, 2011 January 23, 2012 June 4, 2012 September 19, 2011 March 16, 2012 July 31, 2012

19% 34% Yes 33% 33%

46% 48% 48% 58% 68% 59%

78%

37% No 18% 32% 46% 44%

63% 56%

Don't know/unsure

7% 7% 8% 4% 12% 10% 4%

13% 17%

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July 31, 2012 2. For those respondents who replied Yes to question #1: How large do you expect the new quantitative program will be over the next year (12 months)? Please do not include reinvestment of maturing securities.
July 20, 2011 October 31, 2011 April 24, 2012 $700 August 11, 2011 January 23, 2012 June 4, 2012 September 19, 2011 March 16, 2012 July 31, 2012

$628
$600

$567 $527 $532 $457 $377 $448 $456 $451

$500

$400

$300

$200

$100

$0 Average (In Billions)

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July 31, 2012 3. For those respondents who replied Yes to question #1: At which meeting of the Federal Open Market Committee do you think the Fed is most likely to announce a new QE program?
January 23, 2012 March 16, 2012 10% 3% January 2012 33% March 22% 18% April 24, 2012 30% June 4, 2012 40% 50% July 31, 2012 60% 70%

0%

20%

April

0%

Before June Meeting

3% 28% 45% 42% 8% 9%

June

65%

July

18% 26%

47%

September 0% October

6% 9% 6% 8% 9% 6%

56%

0% 3% 0% 0% 0% 0% 0%

December 2012

9% 6%

5%

2013

10%

The Before June Meeting option has only been offered in the June 4 survey.

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July 31, 2012 4. If the Fed does additional QE, how do you think it would be executed?
50%

46%
45%

40%

36%
35%

30%

25%

20%

15%

10%

8%

10%

5%

0% As a lump sum In monthly sums adjusted meeting by meeting In monthly sums tied to specific economic targets Don't Know/Unsure

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July 31, 2012 5. If the Fed does additional QE, what form would it take? (Please answer this question without regard to actions the Fed is taking in Operation Twist.)
80%

74%
70%

60%

50%

40%

30%

20%

20%

10%

2%
0% Purchase only Treasuries Purchase a mix of Treasuries and mortgage-backed securities Purchase only mortgage-backed securities

4%
Don't Know/Unsure

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July 31, 2012 6. If the Federal Reserve announced a $500 billion QE program, what effect would it have on the following rates, in basis points?

10-Year Treasury 0% Up 26 or more Up 21-25 Up 16-20 Up 11-15 Up 6-10 Up 1-5 No effect Down 1-5 Down 6-10 Down 11-15 Down 16-20 Down 21-25 Down 26 or more 0% 0% 2% 3% 5% 0% 5% 5% 3% 0% 2% 2% 5% 7% 5%

30-Year Mortgage 10% 15% 12% 20% 25%

11%

3%

11% 14% 16% 16% 16% 11% 8%

23%

23%

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July 31, 2012 7. If the Federal Reserve announced a $500 billion QE program, what effect would it have on the S&P 500 stock index?
0% Up more than 10% Up 9-10% Up 7-8% Up 5-6% Up 3-4% Up 1-2% Up less than 1% No Effect Down less than 1% Down 1-2% Down 3-4% Down 5-6% Down 7-8% Down 9-10% Down 10% or more 0% 0% 0% 0% 0% 0% 0% 9% 11% 17% 23% 0% 2% 28% 5% 10% 11% 15% 20% 25% 30%

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July 31, 2012 8. Which, if any, of the following additional actions do you think the Fed will take to drive down long-term yields?
0% Reduce the interest rate paid on excess reserves by half Reduce the interest rate paid on excess reserves to zero Offer a negative interest rate on excess reserves Forecast that rates will remain exceptionally low through late-2015 Open a discount window program for small business loans (similar to what the Bank of England recently announced): Forecast that it will keep rates exceptionally low until specific economic targets are met None
18%

10%

20%

30%

40%

50%

60%

11%

24%

4%

51%

11%

31%

Other

7%

Respondents were able to select more than one response, so percentages total more than 100%

Other responses: Additional purchase program Open refinancing window wider Reduce IOER by 10 bps

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July 31, 2012 10. How would you characterize the Fed's current monetary policy?
60%

50%

40%

30%

20%

10%

0%

Too accommodative 41% 26% 39% 34% 37% 53% 36% 33% 28%

Just right 52% 52% 40% 48% 45% 38% 51% 52% 43%

Too restrictive 3% 12% 12% 10% 12% 6% 8% 10% 17%

Dont know/Unsure 5% 10% 9% 8% 5% 4% 6% 5% 13%

July 20, 2011 August 11, 2011 September 19, 2011 October 31, 2011 January 23, 2012 March 16, 2012 April 24, 2012 June 4, 2012 July 31, 2012

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July 31, 2012 11. Where do you expect the S&P 500 stock index will be on ?

1451 1436

1400 1396 1387

December 31, 2012

June 30, 2013

This is the first survey in which we asked for a June 30, 2013 forecast.

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July 31, 2012 12. What do you expect the yield on the 10-year Treasury note will be on ?
January 23, 2012 March 16, 2012 April 24, 2012 July 31, 2013

2.59% 2.52% 2.40%

1.98% 1.69%

December 31, 2012

June 30, 2013

This is the third survey in which we asked for a December 31, 2012 forecast.

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July 31, 2012 13. What is your forecast for the year-over-year percentage change in real U.S. GDP?
July 20, 2011 October 31, 2011 April 24, 2012 August 11, 2011 January 23, 2012 July 31, 2012 September 19, 2011 March 16, 2012

2012

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

2013

+2.59% +2.74% +2.55% +2.26%

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July 31, 2012 14. When do you think the FOMC will first increase the fed funds rate?
April 24, 2012 16% July 31, 2012

14%

12%

10%

8%

6%

4%

2%

0%
2012 Q2 - Q1 April 24, 2012 July 31, 2012 0% Q3 0% 0% Q4 4% 0% 2013 Q2 - Q1 4% 2% 9% 2% Q3 11% 13% Q4 9% 4% 2014 Q2 - Q1 13% 4% 9% 9% Q3 15% 4% Q4 8% 11%

2015 2016 2015 2015 2015 2015 or or - Q1 - Q2 - Q3 - Q4 later later 13% 13% 15% 7% 2% 11%

Note: In the July 31 survey, the choice of 2015 or later was replaced with choices for each quarter and 2016 or later was added.

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July 31, 2012

15. When do you think the FOMC will make its first planned decrease in the size of its balance sheet?
April 24, 2012 18% July 31, 2012

16%

14%

12%

10%

8%

6%

4%

2%

0%
2012 Q2 - Q1 April 24, 2012 July 31, 2012 0% Q3 0% 0% Q4 4% 0% 2013 Q2 - Q1 4% 2% 9% 4% Q3 11% 11% Q4 9% 9% 2014 Q2 - Q1 13% 16% 9% 4% Q3 15% 2% Q4 8% 16%

2015 2016 2015 2015 2015 2015 or or - Q1 - Q2 - Q3 - Q4 later later 13% 4% 7% 2% 4% 16%

Note: In the July 31 survey, the choice of 2015 or later was replaced with choices for each quarter and 2016 or later was added.

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July 31, 2012 16. Where do you expect the fed funds target rate will be on ?
July 20, 2012 October 31, 2011 April 24, 2012 0.0% 0.2% August 11, 2011 January 23, 2012 July 31, 2012 0.4% 0.6% 0.8% 1.0% 1.2% September 19, 2011 March 16, 2012

Dec 31 2012

0.25% 0.27% 0.35% 0.20% 0.23% 0.17% 0.16%

1.01%

June 30 2013

0.41% 0.42% 0.27% 0.20%

Dec 31 2013

0.33%
This is the fourth survey in which we asked for a June 30, 2013 forecast and the first survey in which we asked for a December 31, 2013 forecast.

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July 31, 2012

17. 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)

August 11, 2011 January 23, 2012 July 31, 2012

September 19, 2011 March 16, 2012

October 31, 2011 April 24, 2012

36.1%

34.0%

25.5% 20.3% 20.6%

25.9%

19.1%

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July 31, 2012

18. What is the single biggest threat facing the U.S. economic recovery?
March 16, 2012 0% European recession/financial crisis 5% April 24, 2012 10% 15% 20% 17% 30% 27% July 31, 2012 25% 30% 35% 40% 37% 36% 45%

Tax/regulatory policies 4%

16% 8% 7% 8% 4% 4%

Slow job growth

High gasoline prices

26%

0%

Overall inflation

0%

Deflation

5%

"Fiscal Cliff" 2% 0% 0% 11% 2% 17%

41%

Don't know/unsure

Other:

This is the first survey in which deflation and fiscal cliff have been offered as choices. Other response:
Emerging world recession

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July 31, 2012 19. When it comes to the "Fiscal Cliff," do you believe that:
90%

80%

78%

70%

60%

50%

40%

30%

20%

18%

10%

4% 0%
It is already having It will have an a negative effect on effect later this year business and the economy It will have no effect Don't know/unsure

0%

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July 31, 2012 20. Which, if any, of the following actions do you believe the European Central Bank will take in the next six months? (You may check more than one box.)
0% Undertake another long-term repo operation 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

66%

Offer a negative interest rate on deposits

14%

Cut its main refinancing rate

43%

Purchase additional sovereign debt

89%

Take no additional action

0%

Other

5%

Don't know/unsure

2%

Respondents were able to select more than one response, so percentages total more than 100%

Other responses: Begin to fund ESM More explicitly guarantee debt of crisis countries

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July 31, 2012 22. What is your outlook for the European Monetary Union five years from now?
July 21, 2011 October 31, 2011 January 23, 2012 0% 20% March 16, 2012 40% 60% July 31, 2012 80% 100%

42% 47%
No countries will be ejected or leave

24% 29% 11% 53% 52% 63% 69% 82%

Some countries will be ejected or leave

It will be largely dissolved and most European countries will have their own currency

0% 2% 6% 0% 5%
5% 0% 8% 2% 2%

Don't know/unsure

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July 31, 2012 23. What is the probability, in your opinion, that each of the following countries will default on its debt in the next three years? (0%=No chance of default, 100%=Certainty of default)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Portugal Ireland July 20, 2011 August 11, 2011 September 19, 2011 October 31, 2011 January 23, 2012 March 16, 2012 July 31, 2012 52% 45% 41% 47% 49% 53% 39% 48% 37% 34% 33% 33% 31% 23% Italy 24% 23% 23% 28% 28% 25% 25% Greece 83% 70% 82% 84% 88% 72% 79% Spain 28% 25% 24% 26% 30% 29% 38% 2% 2% 2% 2% 2% 1% 3% 4% 4% 6% 5% 5% Germany France

United United States Kingdom 4% 2% 1% 2% 1% 3% 2% 2% 2% 3% 2% 3% 2%

Germany, France, and United Kingdom were not included in the July 20, 2011 survey. For Greece, respondents to the March 16 and July 31, 2012 surveys were asked for the probability of a second default beyond the March credit event.

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July 31, 2012 What is your primary area of interest?

Currencies 4% Fixed Income 11%

Other 15%

Economics 50%

Equities 20%

Comments: John Augustine, Fifth Third Asset Management: Wwe need three things: 1) sane US fiscal policy, 2) Fed using its balance sheet to help get as many US mortgages down near 3% as possible; 3) ECB buys sovereign debt in near-term; funds ESM next year. Richard Bernstein, Richard Bernstein Advisors: The Fed doesn't have to do further QE because the problems in Europe and the emerging markets are doing it for them. After all, the 10-year is below 1.5% courtesy of Greece and Spain. Mike Dueker, Russell Investments: The Fed needs to meet its implicit nominal GDP growth target of 4.5 percent. July's GDP report revised the numbers back to 2009 Q1. They show that at no time in this recovery has nominal GDP growth reached 4.5 percent on a four-quarter rolling basis. Thus, the basic rationale for a third round of Quantitative Easing is that it appears inescapable to conclude that
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July 31, 2012 the Fed needs to do more to do its part and end this period of subpar nominal GDP growth. Kevin Ferry, Cronus Futures Management: The sun will come up tomorrow. Dennis Gartman, The Gartman Letter: The biggest test facing the U.S. economy is that we shall do something truly stupid: raise taxes and cut spending aggressively, doing immeasurable damage to the economy in the process. We should be flattening and cutting taxes... aggressively, while cutting spending marginally. But we won't; we'll do something truly stupid, along the lines of Andrew Mellon in the middle 1930s, who cut spending/raised taxes and gave us the Depression. Lee Hoskins, Pacific Research Institute: The Ffed has done QE1, QE2, Twist 1, and Twist 2. Each time it expects to stimulate economic growth and each time its actions have failed to do so. Doing QE3 and expecting a different outcome borders on the irrational. Hugh Johnson, Hugh Johnson Advisors: The level of concern about the impact of the contraction in Europe or higher U.S. taxes scheduled to begin on January 1st is so high and the level of stock market optimism is so low that the outlook (near term) has shifted toward positive for U.S. equities. Do equity prices "climb a wall of worry?" We are about to find out. It is unlikely that the contraction in the European economy or the "fiscal cliff" (which should be effectively postponed) is likely to directly cause the end of the current stock market-economic-interest rate cycle. That may be "the message" of the financial markets collectively since June 1. John Kattar, Eastern Investment Advisors: Although I think more QE is coming, it will not be this year. The economy is not weak enough, the stock market is doing well, and interest rates are low
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July 31, 2012 enough. The Fed is on hold until 2013, or at least should be. Also of note is the fact that excess reserves have decreased by $100 billion y/y. The Fed has chosen to replace this with other liabilities so as not to shrink its balance sheet. Barry Knapp, Barclays PLC: Financial conditions have not tightened sufficiently such that stimulus via the portfolio balance channel can loosen conditions. In other words, the policy will have no macroeconomic impact, it will spark a rally in fixed income spreads but pass through to grow will be close to zero. It will make exiting the stimulus more difficult and as a result the costs of any additional stimulus outweigh the benefits. Alan Kral, Trevor Stewart Burton & Jacobsen: The Fed will do all it can to cause noticeable market and/or economic change between now and the election. Guy LeBas, Janney Montgomery Scott: We've entered into the ultimate "muddling along" period when it comes to the markets. Given the fiscal constraints, there's simply no reliable way to juice domestic economic activity, save for waiting for conditions to slowly improve. That means we're talking about low growth through 2015, perhaps longer. John Lonski, Moody's: The outcome of the November elections may give considerable shape to the resolution of the "fiscal cliff." Larry McMillan, McMillan Analysis: Once you go Keynesian, you never go back. Rob Morgan, Fulcrum Securities: On Thursday ECB head Mario Draghi said the ECB is 'ready to do whatever it takes to preserve the Euro.' It is time to translate that statement into action.

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July 31, 2012 Joel Naroff, Naroff Economic Advisors: With the Theater of the Totally Absurd continuing to play in Washington, the slow recovery will continue. No matter who is elected, it will continue anyway. Michael Painchaud, Market Profile Theorems: 2013 - 2014 could well be the worst economic environment for the U.S. and globally since 2008-2009. James Paulsen, Wells Capital Management: The U.S. Federal Reserve has become increasingly irrelevant surrounding any further easing efforts but has also become increasingly important as to how and when they will tighten monetary conditions. The financial markets will likely respond less and less to Fed discussions surrounding additional easing efforts but may become increasingly sensitive to any discussions/i.e., Fedspeak as to monetary tightening. Lynn Reaser, Point Loma Nazarene University: The Fed now faces the possibility of trying to offset policy errors not only in the Eurozone but also mistakes in its own backyard on Capitol Hill. David Resler, Nomura: The question of biggest threat is a close call between the crisis in Europe (already underway) and the "fiscal cliff." While I judge it (only marginally) more likely than not that some sort of stop-gap measure is adopted, the odds that we reach the "cliff" with no action taken is rising. John Roberts, Hilliard Lyons: We currently perceive downside risk to both the economy and equity markets and are very worried that investors are in particular ignoring valuations and risk, and to a lesser degree fundamentals, when purchasing many income-oriented securities in the same way they ignored business fundamentals during the tech bubble. Hank Smith, Haverford Investments: Comprehensive tax reform
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July 31, 2012 that lowers rates and eliminates many deductions along with reducing regulations is the key spurring U.S. GDP growth and is the key to allowing the Fed to start taking its foot off the pedal. Diane Swonk, Mesirow Financial: Timing additional easing is complicated by the need to leverage what the Fed has left to its fullest. It doesnt want to pull the trigger until it can get its best shots in. Feels a little like the Alamo at the moment, although the Fed has a few more gunners. Peter Tanous, Lynx Investment Advisory: The Draghi rally this week (week ending July 27) should be followed by the Bernanke rally next week. Gold will rise as the world realizes that what is happening is ultimately inflationary. Here's the simple reality: There is more debt in the world than can ever be repaid. There are only two ways to solve this problem: devaluation or inflation. For most countries, especially ours, the answer will be inflation. It is simply the only way out. Robert Tipp, Prudential Fixed Income: European policy makers have arrived at their next key decision point. Undoubtedly the market stress to date has damaged economic prospects in Europe. To prevent more serious international spill-over, though, it is critical that European policy makers take steps to bring down peripheral yields over the near term. Overall, the highly uncertain environment continues to stimulate flows into the fixed income market, and is ultimately very positive for the fixed income markets. We believe the best absolute return opportunities are in high yield and emerging markets. Additionally, prospects for outperformance relative to Treasuries remain favorable for structured products and investment grade corporates, especially financials. Lastly, the large swings in market sentiment are creating excellent tactical opportunities in both the U.S. Treasury market, as well as in foreign currencies. Scott Wren, Wells Fargo Advisors: We are going to be in a
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July 31, 2012 modest growth/modest inflation environment for some time. Debt bubbles never end quickly, and this one is going to take time. Politicians in Europe will continue to find ways to kick the can down the road and push the hard decisions into the future. We will be revisiting the European debt crisis for years to come. U.S. politicians will also keep kicking the can down the road, avoiding tough decisions on debt, entitlements, etc. The stock market should respond favorably to these efforts as investors usually quickly get back to focusing on what will happen with the economy and earnings over the next 12-18 months and pay less attention to what will clearly be a big problem somewhere down the road.

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