FED SURVEY

January 28, 2014

These survey results represent the opinions of 45 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 January 23-24, 2014. 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. For all of 2014 and 2015 (and only in those years), what is the total amount of additional asset purchases the Federal Reserve will have made?
2014
$700 $646.1

2015

$600

$500

$466.6 $497.0

$400 Billions $300 $370.6 $367.1 $373.5 $374.8 $381.9

$200 $96.3 $100 $94.2

$0
Apr 30, 2013 Jun 18 Jul 30 Sep 6 Sep 17 Sep 29 Dec 17 Jan 28, 2014

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January 28, 2014 2. Do you expect the Federal Reserve to taper its purchases of assets at the January meeting?
100%

90%

87%

80%

70%

60%

50%

40%

30%

20%

11%
10%

2%
0% Yes No Don't know/unsure

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January 28, 2014 By how much do you expect the Federal Reserve to taper at its January meeting? (Only asked of those who said yes to Q2.)
100%

90%

80%

Average: $9.868 billion

70%

60%

50%

40%

30%

20%

10%

0% $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 More than $50

Billions

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January 28, 2014 What mix of Treasuries vs. mortgage-backed securities do you expect in the Federal Reserve's taper? (Only asked of those who said
yes to Q2.)
100%

90%

80%

MBS 47.73%

70%

60%

50%

40%

30%

Treasuries 52.27%

20%

10%

0%

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January 28, 2014 3. Do you expect the Federal Reserve to reduce its purchases at each of its post-January meetings this year?
80%

72%
70%

60%

50%

40%

30%

28%

20%

10%

0% Yes No

0%
Don't know/unsure

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January 28, 2014 What is the average amount of tapering you expect at each meeting? (Only asked of those who said yes to Q3.)
100%

90%

80%

Average: $10.65 billion

70%

60%

50%

40%

30%

20%

10%

0% $5 $10 $15 $20 $25 $30 Billions $35 $40 $45 $50

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January 28, 2014 4. The Federal Reserve should:

60%

50%

50%

40%

30%

29%

20%

19%

10%

2%
0% Taper faster Taper slower Taper at the same Don't know/unsure pace

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January 28, 2014 5. What impact will tapering have on ?

Bond yields
90% 83% 80%

Stock values

Unemployment rate

70%

60%

56%

54%

50%

40% 35% 30% 35%

20% 14% 10% 7% 7% 2% 0% Move higher Have no effect Move lower 2%

5% 0%

Don't know/unsure

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January 28, 2014 6. The Federal Reserve has strengthened its guidance about keeping rates lower for longer, at least in part as an offset to the effects of tapering. When it comes to keeping interest rates low:
45%

40%

40%
35%

35%

30%

25%

21%
20%

15%

10%

5%

5%

0% Guidance is a good Guidance is more Guidance is less Don't know/unsure substitute for asset effective than asset effective than asset purchases purchases purchases

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January 28, 2014 7. Given what you know about new presidential appointees to the Federal Reserve Board and the bank presidents who will vote this year on the Federal Open Market Committee, would you characterize the voting members of the committee in 2014 compared to 2013 as:
45%

40%

38% 33%

35%

30%

26%
25%

20%

15%

10%

5%

2% 0%
Much more dovish Somewhat more dovish About the same Somewhat more hawkish

0%

0%
Much more Don't hawkish know/unsure

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January 28, 2014 8. Compared to Ben Bernanke, Fed chair nominee Janet Yellen will be:
Oct 29
60%

Dec 17

Jan 28

52%
50%

51%

44%
40%

40% 33%

30%

28%

20%

15% 10% 7% 2%
0% Much more dovish Somewhat No different more dovish

10%

10%

3% 0%
Somewhat more hawkish 0% 0% 0%

2% 2%
Much more Don't hawkish know/unsure

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January 28, 2014 9. Overall, how do you rate the clarity and credibility of Fed communications?
Oct 29
60%

Dec 17

Jan 28

55% 56% 54%

50%

40%

30%

26% 24% 21%

20%

18% 15% 12%

10%

5%

7% 7%

0% Very clear and Somewhat clear Somewhat not credible and credible clear and credible Not very clear and credible

0% 0% 0%
Don't know/unsure

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January 28, 2014 10. Which of these is the bigger risk to your forecast for Fed policy this year?
40%

37%
35%

35%

30%

28%

25%

20%

15%

10%

5%

0% Fed will be more dovish than I expect Fed will be more hawkish than I expect

0%
Risks are balanced Don't know/unsure

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January 28, 2014 11. Where do you expect the S&P 500 stock index will be on ?
June 30, 2014
1,950

December 31, 2014

1913
1,900

1857
1,850

1844

1816

1814

1,800

1751
1,750

1752 1709

1723

1,700

1,650

1,600

1,550

1,500 Jun 18 Jul 30 Sep 6 Sep 30 Survey Dates Oct 29 Dec 17 Jan 28

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January 28, 2014 12. What do you expect the yield on the 10-year Treasury note will be on ?
June 30, 2014
4.0%

December 31, 2014

3.5%

3.33%

3.39%

3.44%

3.37%

3.18% 3.10% 3.00%

3.0%

3.08%

2.80%

2.5%

2.0% Jun 18 Jul 30 Sep 6 Sep 30 Survey Dates Oct 29 Dec 17 Jan 28

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January 28, 2014 13. What is your forecast for the year-over-year percentage change in real U.S. GDP for ?
2013
3.0% +2.9%

2014

2015

2.5%

2.0%

1.5%

1.0%

Janu ary Mar Apr 23, 16 24 2012

Jul 31

Jan Sep Dec Mar Apr 29, 12 11 19 30 2013

Jun 18

Jul 30

Jan Sep Oct Dec 28, 17 29 17 2014

2013 +2.6 +2.7 +2.6 +2.3 +2.2 +1.9 +2.1 +2.1 +2.1 +2.1 +1.9 +2.0 +1.9 +2.2 +2.3 2014 2015 +2.6 +2.6 +2.6 +2.6 +2.5 +2.6 +2.5 +2.6 +2.8 +2.9

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January 28, 2014 14. When do you think the FOMC will first increase the fed funds rate?
Increase fed funds rate (Average response)

Survey Date Dec 11 2013 Q2 Q3 Q4 2014 Q1 Q2 Q3 Q4 2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4

2017 or later
2015 Q1 2015 Q1 2015 Q1 2015 Q2 2015 Q2 2015 Q3 2015 Q2 2015 Q3 2015 Q3 2015 Q3 2015 Q3

Jan 29 13

Mar 19

Apr 30

Jun 18

Jul 30

Sept 6

Sept 17

Oct 29

Dec 17

Jan 28 14

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January 28, 2014 15. Currently, Fed policy is not to raise interest rates until the unemployment rate is at least 6.5%. Will the Fed change that guidance?
Jul 30
70%

Sep 17

Oct 29

Dec 17

Jan 28

60%

60%

On average, those answering yes thought the new rate will be 6.0%

50%

51% 49% 47% 44%

51% 44% 42% 42%

40%

30%

30%

20%

10%

10%

11% 7% 7%

4%
0% Yes No Don't know/unsure

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January 28, 2014 24. Where do you expect the fed funds target rate will be on ?
1.0%
0.97% 0.92%

0.82%

0.8%
0.70% 0.72%

0.6%

0.4%

0.28%

0.20%

0.21% 0.18% 0.16% 0.14%

0.21%

0.20%

0.2%

0.19%

0.13%

0.14% 0.16%

0.0%

Jul 31 June 30, 2014 Dec 31, 2014 Dec 31, 2015

Jun Sep Oct Dec Jan Jul 30 Sep 6 18 17 29 17 28 0.20% 0.18% 0.16% 0.14% 0.13% 0.14% 0.16% 0.28% 0.21% 0.21% 0.20% 0.19% 0.97% 0.92% 0.82% 0.70% 0.72%

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January 28, 2014 25. 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% 34.0% 30%

36.1%

28.5% 25.9% 25.5% 26.0% 20.6% 20.4% 19.1% 17.6% 15.2%

25%

20%

20.3%

18.2%

18.4% 16.9% 16.2% 17.3%

15%

15.3%

10%

5%

0%

Survey Dates

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January 28, 2014 26. What is the single biggest threat facing the U.S. economic recovery?
Apr 30 Jun 18 Jul 30 0% European recession/financial crisis Tax/regulatory policies Slow job growth High gasoline prices Overall inflation Deflation Debt ceiling Too little budget deficit reduction Too much budget deficit reduction Rise in interest rates Other Don't know/unsure Too Too little European High Tax/regul much Debt Overall Slow job budget recession budget Deflation gasoline atory deficit /financial ceiling inflation growth prices policies deficit reduction crisis reduction 9% 2% 2% 2% 0% 2% 20% 31% 20% 13% 10% 18% 8% 15% 12% 4% 4% 5% 2% 2% 2% 0% 2% 3% 2% 2% 0% 2% 4% 3% 2% 0% 3% 2% 0% 3% 0% 0% 3% 0% 2% 3% 2% 2% 2% 4% 7% 3% 5% 2% 20% 22% 22% 24% 29% 30% 28% 30% 27% 29% 32% 21% 15% 8% 4% 8% 5% 7% Sep 17 5% Oct 29 10% 15% Dec 17 20% Jan 28 25% 30% 35%

Don't know/un sure Apr 30 Jun 18 Jul 30 Sep 17 Oct 29 Dec 17 Jan 28 0% 0% 4% 2% 0% 2% 0%

Other

Rise in interest rates

11% 13% 14% 7% 13% 2% 21%

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January 28, 2014 27. What is your primary area of interest?

FED SURVEY
April 30,
Other 21%

Currencies 0% Fixed Income 14%

Economics 45%

Equities 19%

Comments: Robert Brusca, Fact and Opinion Economics: The economy is upbeat on the data and trend but end-2013 growth was too much on the back of inventories and we do not yet have reliable service sector spending OR job growth. Until we get that, stronger expectations for job growth are on thin ice. The waffling in auto sales at year-end is getting NO attention whatsoever. Should it??? Tony Crescenzi, PIMCO: Janet Yellen enters a position shaped by 100 years of challenges, and she is as qualified as any incoming Fed chair to lead the Fed through the next set, a comforting thought for investors. The attainment of price stability also means protecting against an inflation rate that is too low, which is why todays low inflation rate will be one of Janet Yellens most important guiding lights. When Janet Yellen was nominated Fed chair, many focused on how she differed from her predecessor, Ben Bernanke. Many still
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January 28, 2014 do. This is appropriate but only to a point. It is important to remember that when Janet dons her cloaks as Fed chair, her actions SURVEY will be guidedFED by powerful precedents including the central banks April 30, the institutionalization of its processes, its plethora of experiences, success in acting as a lender of last resort, and its hard-won gains in achieving price stability. Lou Crandall, Wrightson: Asset purchases are likely to be negative in 2015, as the Fed is likely to start to let MBS run off by the second half of the year. Frederic Dickson, D.A. Davidson & Co.: Economic growth depends in large part on regulatory stability--no new surprises and gradual growth of our major European trading partners. Increased energy production from the Bakken field is a huge positive wild card for 2014 and 2015. John Donaldson, Haverford Trust Co.: Rather than changing the unemployment rate in their guidance, the FOMC will remove a specific target due to the issues with computation as a result of people leaving the labor force. I would not be surprised to see commentary that references a reversal in the trend to actually increase the labor force as a revised indicator for their policy decisions. Mike Dueker, Russell Investments: 2013 was a year in which markets re-evaluated recession risks. After the Great Recession many people bought into the stall-speed story of more frequent recessions this decade. 2013 was the year in which the stall-speed story lost credence and the market realized that recession risks are low and should remain low for several years. Thus, 2014 is like 1996---a mid-cycle acceleration in the economy with low perceived recession risks. Kevin Giddis, Raymond James/Morgan Keegan: We are slowly
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January 28, 2014 moving away from interest rates, the Fed, and job growth as the catalyst for and sustaining economic growth, to how much Federal FED debt and a lack of aSURVEY budget deal are going to limit the upside April 30, potential to the economy. Hugh Johnson, Hugh Johnson Advisors: As stated previously, the end of QE3 has been fully priced into the level of interest rates and equity prices. Equity prices moving from being 6% overvalued (Q4 2013) to having been 4% overvalued. Likely to become 5% undervalued or reach 1700-1750 (S&P 500) before correction ends...over time. John Kattar, Ardent Asset Advisors: Markets are too shaky to taper now, especially with the looming Bernanke-Yellen transition. Barry Knapp, Barclays PLC: The belly of the Treasury curve is pricing too passive a rate normalization cycle. This is not a question of when the rate hikes begin but how fast they will increase rates once the process starts. 100bp per year is discounted by the Eurodollar curve and 5-year Treasury yields. It is unlikely to be less than 2. This implies curve flattening which will curb equity investors' late-2013 enthusiasm. David Kotok, Cumberland Advisors: It is time to normalize central banking in the United States. 2014 is the year. Guy LeBas, Janney Montgomery Scott: If nothing else, 2014 is the "year of the consensus" among forecasters (bullish on stocks, bearish on bonds), which increases the risks that stocks underperform and bonds outperform expectations. Fundamental events in emerging markets are increasingly concerning. In 2013, we blamed capital flows for EM problems, but it appears there are some legitimate governance issues in China, Argentina, Turkey, and Thailand in particular.

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January 28, 2014 John Lonski, Moody's: A 3% 10-year Treasury yield is too burdensome for the world economy. 2014-to-date's -4.2% drop by FED SURVEY housing-sector share prices (that's deeper than the overall -2.8% 30, decline by theApril market value of US common stock) and the -6.9% yearly drop by homebuyer mortgage applications of the latest 13week span reinforce the view that Treasury bond yields are too high. Eventually, markets will come to appreciate the disinflationary nature of the unprecedented change in US demographics, where during the next 10 years the number of Americans aged 16 to 64 years grows by less 0.5% annually, on average, while the 65-years and older cohort expands by a much faster 3.5% annually. Drew Matus, UBS Investment Research: A key concern for markets should be the Fed's forward guidance for rates seems historically abnormal, i.e. too slow and too long. A Taylor rule using the Fed's forecasts shows a much sharper pace of tightening happening much sooner. The outcome could be higher volatility. Rob Morgan, Fulcrum Securities: Janet Yellen's biggest challenge may be reducing the size of the Fed's balance sheet. Joel Naroff, Naroff Economic Advisors: The unemployment rate is likely to be below 6% by year's end and that should trigger sharper wage gains and a surge in spending and economic growth. By this time next year, we will be talking about rate hikes, if they haven't already occurred. James Paulsen, Wells Capital Management: For me, it already feels like Fed policy has dropped in importance among most investors. Now that the Fed has decided to begin tapering, other issues seem to have become more important in shaping the investment/economic climate this year including whether money velocity begins to rise, whether capital spending finally emerges and whether the emerging world economies do indeed reaccelerate.

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January 28, 2014 Lynn Reaser, Point Loma Nazarene University: The Fed's crystal ball will need to be extra clear this month, as the FOMC meeting FED takes place just oneSURVEY week ahead of new jobs figures. Policymakers April to 30, are likely to decide dismiss December's weak report as an anomaly and press ahead with more tapering. This will be a big bet. John Roberts, Hilliard Lyons: Declining corporate profitability combined with some economic distortions could very well lead to a recession late this year or early in 2015. Indications of corporate profit issues are already arising with a higher level than normal of earnings warnings and fewer companies exceeding expectations than typical. Profit margins will eventually regress to the norm. Expect a down market for 2014, driven by a significant second-half decline. Allen Sinai, Decision Economics: The basic prospect for the U.S. and world economy is bright but out of the blue crises are possible; in particular EMG. Hank Smith, Haverford Investments: The equity markets are due for a pullback/correction and it has nothing to do with Fed policy. The pullback/correction should be short-lived as the fundamentals are good and there is a ton of cash looking for this opportunity. Diane Swonk, Mesirow Financial: The gap between what the Fed says and what financial markets are hearing appears to have narrowed. It is unclear they will stay on same page as forward guidance becomes a more important policy tool Peter Tanous, Lynx Investment Advisory: The risk I worry about is a negative world reaction to the $4 trillion Fed balance sheet and investors demanding higher interest rates on U.S. debt. This could cause a spike in rates that would lead to a cascade of financial instability around the world.

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