FED SURVEY

September 12, 2012

These survey results represent the opinions 58 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 September 7-10, 2012, after the U.S. August employment 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)?
Yes 120% No Don't know/unsure

100%

80%

60%

40%

20%

0%

Sept July 27, Oct 11 Nov 1 20, 2010 2011 70% 26% 4% 93% 4% 3% 99% 1% 0% 19% 68% 13%

Aug 11 46% 37% 17%

Sept Oct 31 19 34% 59% 7% 48% 46% 7%

Jan March April Sept June 4 July 31 23, 16 24 12 2012 48% 44% 8% 33% 63% 4% 33% 56% 12% 58% 32% 10% 78% 18% 4% 90% 5% 5%

Yes No Don't know/unsure

For the 2010 surveys, the question was: Do you believe the Federal Reserve will begin a resumption of quantitative easing (asset purchases) that would increase the size of its portfolio?

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September 12, 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.
Average (In Billions) $650

$600

$550

$500

$450

$400

$350

$300

July 20, 2011

Aug 11

Sept 19

Oct 31

Jan March April 23, 16 24 2012

June 4

July 31

Sept 12

Average (In Billions) $377 $628 $527 $457 $567 $448 $456 $451 $532 $510

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September 12, 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?
Jan 23 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan 2012 March Jan 23 March 16 April 24 June 4 July 31 Sept 12 3% 33% April 22% 18% 0% 3% March 16 April 24 June 4 July 31 Sept 12

Before June Meeting

June 28% 45% 65% 42%

July 8% 9% 18% 47% 26%

Sept 6% 9% 6% 8% 56% 77%

Oct 0% 9% 6% 0% 3% 8%

Dec 0% 9% 6% 0% 5% 16%

2013

0% 0% 0% 10% 0%

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

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September 12, 2012 4. If the Fed does additional QE, how do you think it would be executed?
July 31 70% Sept 12

65%

60%

50%

46%

40%

36%

30%

20%

14% 11%
10%

8%

10% 11%

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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September 12, 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.)
July 31 90% Sept 12

86%

80%

74%

70%

60%

50%

40%

30%

20%

20% 9% 2% 2%
Purchase a mix of Treasuries and mortgage-backed securities Purchase only mortgage-backed securities

10%

4%

4%

0% Purchase only Treasuries Don't Know/Unsure

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

60%

60%

50%

40%

32%
30%

20%

10%

9%

0% Yes No Don't know/unsure

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September 12, 2012 7. If the Fed does choose to use economic targets, which of the following do you favor? (You may select more than one.)
60%

55%
50%

40%

40% 36%

30%

20%

10%

9%

0% Inflation Other responses: Language: We will continue to ease until there is significant and sustained improvement in the health of the economy. Money supply (2) Equity market Annual job growth Unemployment rate Nominal GDP Other

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September 12, 2012 8. In the Feds policy statement after its September 12-13 meeting, the FOMCs low-rate calendar guidance will:
45%

40%

39%

35%

30%

28%

26%

25%

20%

15%

10%

5%
5%

2%
0% Be extended Be extended Be extended until mid until late to 2016 or 2015 2015 later Comments on this question: Remain at late 2014

0%

Be dropped Don't or replaced know/unsure

Guy LeBas, Janney Montgomery Scott: It's been six months since the Fed last extended guidance, little has changed, so it seems logical they'll extend guidance for another six months. Scott Wren, Wells Fargo Advisors: I think this extension language will be "step 1" in letting the market know something more is coming. Mike Dueker, Russell Investments: It does not seem particularly useful or binding to extend the rate guidance well beyond the end of Ben Bernanke's term as Fed chair.

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Clare Zempel, Zempel Strategic: Fed should say it is committed to faster nominal GDP growth and will let rates move toward more normal levels. David Resler, Nomura: Expect the language to be "into 2015." Being less specific about timing will allow further refinements to a 2015 date in the future should that be necessary. I think the FOMC will be reluctant to adjust the guidance to include any date beyond the forecast horizon, which will be extending to 2015 for the first time at the September meeting. Mark Luschini, Janney Montgomery Scott: The Fed may move from a date dependent comment to a state dependent comment. Ethan Harris, BofA Merrill Lynch Global Research: Since the economy has made no real progress in the past year, extending the on hold period for another year makes sense. Mike Englund, Action Economics: The current reference to late-2014 is already inconsistent with a large pool of the point-estimates from many FOMC members, so even though there's talk of extending the reference, I think it further erodes credibility to commit to something as a group that so few members personally appear to believe. Subodh Kumar, Subodh Kumar & Associates: Current FOMC should leave leeway for next Chairman after 2014. Lou Brien, DRW Trading Group: It is possible that they commit to the low rates for an indefinite period contingent on economic targets. Drew Matus, UBS Investment Research: Anything beyond Jan 2014 is a pointless exercise. Diane Swonk, Mesirow Financial: Harassment of a Fed Chairman is nothing new; the push by an entire political party to reverse the course of monetary policy as a campaign platform is. The Fed will do what it believes is right, but the credibility of forward guidance is being severely undermined by the current political environment. Mark Vitner, Wells Fargo: This would mean rates are expected to remain near zero for 7 years. The average time between recessions is only 5 years! Robert Brusca, Fact and Opinion Economics: Extending the guidance on low rates is more likely to to be constricting than to be helpful. See the Jackson Hole Paper by Woodford. Kevin Ferry, Cronus Futures Management: Fed forecast was already there. Chris Rupkey, Bank of Tokyo-Mitsubishi: Stock market rallying on hopes for QE3 even as investors believe QE3 will have virtually no effect. Market does not seem to know what it wants, but the Fed is going to give it to them anyway. Michael Painchaud, Market Profile Theorems: Our expectation is for a very poor earnings reporting period for Q3. This would be a major factor in forcing the Fed's hand to be more proactive in terms of its policy and timeline for its execution.

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

60%

59%

50%

40%

36%

30%

20%

10%

5%
0% Yes No Don't know/unsure

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September 12, 2012 10. Would further purchases of government or mortgage backed securities by the Fed impair market pricing and overall functioning?
60%

52%
50%

43%
40%

30%

20%

10%

5%

0% Yes No Don't know/unsure

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September 12, 2012 11. Are Americans better off than they were four years ago?
60%

50%

49%

40%

40%

30%

20%

10%

6%

6%

0% Yes No The same (not better and not worse) Don't know/unsure

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September 12, 2012 12. Who do you think will win the presidential election in November? Who do you want to win?
Think Will Win 60% Want To Win

53%
50%

46%

40%

31%
30%

29%

24%
20%

18%

10%

0% Barack Obama Mitt Romney Don't know/unsure

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September 12, 2012 13. Will Federal Reserve Chairman Ben Bernanke resign if Mitt Romney wins in November?
90%

80%

80%

70%

60%

50%

40%

30%

20%

13%
10%

7%

0% Yes No Don't know/unsure

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September 12, 2012 14. Where do you expect the S&P 500 stock index will be on ?
Jan 23 March 16 April 24 July 31 Sept 12

1497

1453 1436

1451

1400 1387

1396

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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September 12, 2012 15. 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

2.52%

2.59% 2.40%

1.98% 1.78% 1.69%

2.06%

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

2012

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

2013

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

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September 12, 2012 17. When do you think the FOMC will first increase the fed funds rate?
April 24 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
2012 Q2 - Q1 April 24 July 31 Sept 12 0% Q3 0% 0% 0% Q4 4% 0% 0% 2013 Q2 - Q1 4% 2% 0% 9% 2% 0% Q3 11% 13% 13% Q4 9% 4% 4% 2014 Q2 - Q1 13% 4% 5% 9% 9% 4% Q3 15% 4% 5% Q4 8% 11% 9%

July 31

Sept 12

2015 2016 2015 2015 2015 2015 Don't or or - Q1 - Q2 - Q3 - Q4 know later later 13% 13% 15% 9% 11% 7% 5% 2% 9% 11% 18% 5% 3% 8%

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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September 12, 2012

18. When do you think the FOMC will make its first planned decrease in the size of its balance sheet?
April 24 18% July 31 Sept 12

16%

14%

12%

10%

8%

6%

4%

2%

0%
2012 Q2 - Q1 April 24 July 31 Sept 12 0% Q3 0% 0% 0% Q4 4% 0% 0% 2013 Q2 - Q1 4% 2% 0% 9% 4% 4% Q3 11% 11% 6% Q4 9% 9% 7% 2014 Q2 - Q1 13% 16% 11% 9% 4% 6% Q3 15% 2% 2% Q4 8% 16% 9%

2015 2016 2015 2015 2015 2015 or or - Q1 - Q2 - Q3 - Q4 later later 13% 4% 9% 7% 6% 2% 7% 4% 4% 16% 17%

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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September 12, 2012 19. Where do you expect the fed funds target rate will be on ?
July 20, 2012 October 31, 2011 April 24 0.0% 0.2% August 11, 2011 Jan 23 July 31 0.4% 0.6% September 19, 2011 March 16 Sept 12 0.8% 1.0% 1.2%

Dec 31 2012

0.25% 0.27% 0.35% 0.20% 0.23% 0.17% 0.16% 0.14%

1.01%

June 30 2013

0.41% 0.42% 0.27% 0.20% 0.14%

Dec 31 2013

0.33% 0.27%
This is the fifth survey in which we asked for a June 30, 2013 forecast and the second survey in which we asked for a December 31, 2013 forecast.

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September 12, 2012 20. 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%

25%

25.5%
20.3%

25.9%

26.0%

20%

20.6%

19.1%
15%

10%

5%

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

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September 12, 2012 21. 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: 2% 11% 0% 17%

March 16 17% 36% 4% 26% 4%

April 24 37% 27% 8% 8% 4%

July 31 30% 16% 7% 0% 0% 5% 41% 0% 2%

Sept 12 24% 11% 15% 0% 0% 2% 39% 2% 7%

This is the second survey in which deflation and fiscal cliff have been offered as choices.
Other responses: Uncertainty (2) Europe/Election/Cliff A show of lack of confidence among U.S. leaders including Federal Reserve, Treasury, the President, and Congress.

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September 12, 2012 22. When it comes to the "Fiscal Cliff," do you believe that:
July 31 90% Sept 12

80%

78%

74%

70%

60%

50%

40%

30%

20%

18%

15% 4%

11% 0% 0%

10%

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

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September 12, 2012 23. What is your outlook for the European Monetary Union five years from now?
90%

80% Some countries ejected/leave 70%

60%

50%

40%

No countries ejected/leave

30%

20%

10% Don't know/unsure 0% No countries ejected/leave Some countries ejected/leave Largely dissolved/Most countries have own currency Don't know/unsure

Largely dissolved/Most countries have own currency Jan 23, 2012 24% 63% 6% 8% March 16 29% 69% 0% 2% July 31 11% 82% 5% 2% Sept 12 26% 72% 2% 0%

July 21, 2011 42% 53% 0% 5%

Oct 31 47% 52% 2% 0%

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September 12, 2012 24. 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 Aug 11 Sept 19 Oct 31 Jan 23, 2012 March 16 July 31 Sept 12 52% 45% 41% 47% 49% 53% 39% 34% 48% 37% 34% 33% 33% 31% 23% 19% Italy 24% 23% 23% 28% 28% 25% 25% 23% Greece 83% 70% 82% 84% 88% 72% 79% 70% Spain 28% 25% 24% 26% 30% 29% 38% 33% 2% 2% 2% 2% 2% 1% 2% 3% 4% 4% 6% 5% 5% 6% Germany France

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

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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September 12, 2012 What is your primary area of interest?

Currencies 2%

Other 13%

Fixed Income 16%

Economics 49%

Equities 20%

Comments:
Lou Brien, DRW Trading Group: Unfortunately there are so many variables for Fed policy, Europe, etc., more uncertainty than I can recall, that I found it very difficult to toss my darts at this survey. Robert Brusca, Fact and Opinion Economics: The Draghi Band-Aid leaves the fiscal cliff as the single biggest near-term economic risk. But the longer term risk from Europe is still very significant as the Draghi plan fixes nothing and papers over the structural cracks in EMU. The U.S. economy still has its own conundrums, among them, tax and public policy issues, and the need to sort out the problem of the huge future fiscal deficits. It is not clear if our politicians are prepared to address these dire issues and needs. Like Europe, when it comes to our biggest needs we have tended to kick the can down the road. We need someone to kick us in the can to get us going in the right direction on a different road. Tony Crescenzi, PIMCO: No central bank ever created anything tangible you wont find any stories about a Fed chairman discovering electricity or creating the light bulb. What central banks are best at creating are fiat currencies, and these are only as valuable as what they are backed by, whether it be gold, silver, or the productive capability of a nation. The orderly liquidation of debt therefore requires not money

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September 12, 2012

printing but economic growth. Only with the restoration of growth, competitiveness, and external balance can developed nations solve their debt dilemmas. Mike Dueker, Russell Investments: If many FOMC members meant what they said about needing to see "substantial and sustainable strengthening in the pace of the economic recovery" in order not to implement a third round of quantitative easing, then it is time for them to act, given the employment report and manufacturing ISM. Rate guidance alone will not raise nominal GDP growth to at least 4.5 percent at a satisfactory pace. Mike Englund, Action Economics: The Fed signaled a likely September policy move in the prior minutes, and the last employment report should seal the deal around QE rather than a communication change. Nevertheless, there is likely little economic benefit from further QE action despite the defense made by Chairman Bernanke at Jackson Hole. The Fed is simply trying to look like part of the solution rather than part of the problem, which is really a "political" response to a desire to not be political. Kevin Giddis, Raymond James/Morgan Keegan: The next three months will be critical for both the Fed and the U.S. economy. If something can't be done soon about the lack of job growth, I believe that we are destined for a new recession. Ethan Harris, BofA Merrill Lynch Global Research: The U.S. and global economy are entering the most dangerous period of this economic recovery. If the fiscal cliff is badly handled at the same time that the European crisis enters another acute phase, a recession is likely. Hugh Johnson, Hugh Johnson Advisors: The message of the financial markets collectively has been that (a) we face two significant risks (the fiscal cliff and Europe) (b) but neither will derail the current stock market-economic-interest rate cycle. Hence, the outlook for the stock market and economy is positive although not upbeat. We face a valuation issue in the equity markets which may, along with the disheartening political process, put near-term downward pressure on equity prices in September and October. This is likely to be, simply, a correction in an ongoing rise in equity prices. Although the Federal Reserve is likely to appease investors and Wall Street with a QE, it is unlikely that this will materially impact/help economic output. There exist ample reserves to support any given level of bank lending and monetary growth and, if you look closely, bank lending and money growth rates remain quite solid. It is hard to make the case for a contraction in the U.S. economy (and bear market) under these conditions. So...positive...but uninspiring.

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John Kattar, Eastern Investment Advisors: QE has been made much more likely by the ECB's recent action. Controlling the dollar's rise is a policy objective of the Fed, whether they admit it or not. The next Fed easing will likely consist of a combination of asset purchases, swap lines with the ECB, and changes in the language of the statement. Barry Knapp, Barclays PLC: Additional stimulus will have little to no macroeconomic effect. Financial conditions are not tight, so any increase in stock prices will not impact business confidence enough to change risk appetite. Business confidence is weak due to public policy uncertainty and external factors. The situation with consumer confidence is worse. Unsterilized QE risks even higher energy prices which could further depress confidence and impair consumer cash flow during the critical holiday spending period. Still, none of these costs will be evident in the near-term so equity investors may push stocks higher but in our view the costs outweigh the benefits. David Kotok, Cumberland Advisors: We are re-writing all the textbooks. Old models fail us. The unintended consequences of present policies loom large and are unknown. Moral Hazard works that way. Alan Kral, Trevor Stewart Burton & Jacobsen: Monetary influences on the economy are exhausted. Any further efforts are aimed at confidence. Subodh Kumar, Subodh Kumar & Associates: The basics for banking now are lending, while they clean up investment banking. The basics for companies in this cycle remain improving efficiency. Guy LeBas, Janney Montgomery Scott: What the Fed doesn't tell you is that they're adding fuel to the monetary fire in order to stave off deflation risk, not to directly boost job growth. Drew Matus, UBS Investment Research: The Fed's QE3 program will likely create more problems than it solves. Our election model (based on percentage change in unemployment and bond yield during election years) currently has Romney with 50.1 percent of the popular vote. (Stat insig). Rob Morgan, Fulcrum Securities: Recent Fed minutes show that many members believe additional 'monetary accommodation' would be warranted if incoming economic data does not show 'substantial and sustainable' improvement in the recovery. Friday's jobs report did not show that improvement so it is likely that QE3 will come during the Fed announcement following the September meeting.

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September 12, 2012

Joel Naroff, Naroff Economic Advisors: Unless the economy is clearly in danger of faltering further, the Fed is not going to use a policy tool, QE3, that it knows is not very effective, since it does not want to risk losing total credibility. David Resler, Nomura: The better off than four years ago question is complicated by the abrupt deterioration that occurred slightly less than four years ago. By many key objective metrics - employment, unemployment, real disposable personal income, household net worth - people are worse off than four years ago. But real GDP is a cumulative 1.9 percent higher than four years ago (compared to an average of 14.5 percent cumulative increase over all 16-quarter spans since 1947.) John Roberts, Hilliard Lyons: While equity valuations remain attractive, uncertainty related to government policy, the election, and the "fiscal cliff" is holding back the economy and creating the chance for a pullback in the equity markets, as well as increasing the chance for a recession in 2013, which would vastly change our bullish outlook for the year. Hank Smith, Haverford Investments: For a number of your questions in this survey it all depends on whether the "fiscal cliff" is averted or not. If the fiscal cliff occurs, the U.S. goes into a recession. If it is avoided (all current tax rates extended for a year and spending sequestration suspended) and comprehensive tax reform is enacted by the spring, our economic growth far exceeds current consensus forecasts. Diane Swonk, Mesirow Financial: The political environment is undermining what little ammo the Fed has left. That will not stop them, however, from doing what they feel they have to do. Robert Tipp, Prudential Fixed Income: The QE call for the next Fed meeting is a tough one. The inherent risks of additional QE, combined with the recent decline in Europe-related risk might argue for a 'wait and see' approach. However, it seems more likely that the Fed will take additional steps at this meeting to boost growth, with pushing out the 'low for long' language into 2015 and launching a sterilized Treasury and mortgage buy program. In any case, the subdued economic outlook suggests Treasury yields are likely to remain low and range bound. This will keep yield hungry fixed income investors moving into the spread sectors, including structured products, emerging markets, and both investment grade and high yield corporate bonds, driving their spreads relative to Treasuries down, and boosting their relative performance. Dovish Fed policy is likely to keep downward pressure on the U.S. dollar relative to many emerging and developed market currencies, boosting the returns on foreign bonds. At the nexus of these trends of declining European risk and stronger currencies,

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bonds of countries like Italy and Spain, uncertainties notwithstanding, may very well post some of the best returns in fixed income over the next few years. Mark Vitner, Wells Fargo: I do not believe that QE3 will provide much of a boost but the Fed appears to have little alternative and needs to provide some insurance against fiscal risks. Scott Wren, Wells Fargo Advisors: GDP growth is going to be well below trend this year and next. Unemployment is going to remain high from a historical perspective. The Fed's dual mandate means they are not going to sit on their hands and do nothing. There is plenty of liquidity in the system but you can't force people or businesses to borrow and spend. Once a credit bubble bursts it typically affects economic growth for years....this time will be no different. This is going to take time. We need clarity out of Washington (yes, we unfortunately need to count on our elected officials) on taxes, regulation, and the cost to hire an additional employee before businesses are confident enough to invest for the future. They can't make strategic decisions in this environment. Clare Zempel, Zempel Strategic: Market monetarism's prescriptions afford the best chance to lift economic growth, reduce unemployment, and create an environment in which fiscal problems become tractable.

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