Respondents to the CNBC Fed Survey for December are sure the Federal Reserve will cut rates on Wednesday, but they are less sure whether it should.

Amid forecasts for somewhat higher inflation and lower unemployment than in the prior survey, 93% see a quarter-point cut coming. But only 63% believe it's what the Fed ought to do. The outlook for 2025 is for just two more quarter-point cuts, down from three in the last survey, bringing the funds rate down to 3.8% by this time next year and 3.4%, or just above the average neutral rate, by the end of 2026.

One big unknown is the incoming administration's fiscal policies. Respondents expressed a range of opinions: from concern about higher inflation to bullishness for growth.

"Initial indications are that the Trump election has stoked animal spirits amongst consumers, households and small businesses," wrote Troy Ludtka and Joseph LaVorgna, economists at SMBC Nikko Securities Americas. "Depressed sentiment in these areas has dogged the U.S. economy since the Covid pandemic. As a result, we see the economic outlook as having brightened materially."

But the survey of 27 respondents, including economists, strategists and fund managers, showed that the outlook for President-elect Donald Trump's tariffs and threatened deportations dampened the upside for some forecasters.

"I can't remember being this uncertain about the inflation outlook," said economist Robert Fry. "President-elect Trump is offering us a mix of inflationary (tariffs, individual tax cuts) and disinflationary (deregulation, spending cuts) policies. Who knows what combination we're going to end up with?"

Inflationary risks

A 56% majority of respondents see the effects of policies from the incoming administration that are likely to be enacted as "somewhat inflationary" and a further 11% see them as "extremely inflationary." They are divided on the growth effects, with 41% seeing the policies as "somewhat positive" for growth and 41% viewing them as "somewhat negative."

The biggest risks to the expansion are high inflation and global economic weakness, with a tie for third between the incoming administration's fiscal policies and the size of the U.S. deficit. Several survey participants wrote in "tariffs" specifically as a top threat.

There's uncertainty over the purpose of the tariffs and whether they are just negotiating tactics. Overall, 37% say tariffs are a negotiating tactic that are likely to be temporary, 19% see them as revenue measures that are likely to be more permanent and 41% believe it will be a combination of the two. Two-thirds say the threatened 25% tariffs on Mexico and Canada will depend on negotiations, but 70% expect President-elect Trump to carry through on 10% additional tariffs on China.

"The economy remains surprisingly strong and the only risks on the horizon stem from potential tariffs and the possible deportation of essential, largely non-replaceable immigrant workers," wrote economist Joel Naroff.

Stocks' gains may be limited from here

Respondents raised their outlook for the S&P 500 next year but increasingly see equities as overextended. From current levels, the S&P 500 is forecast to rise just 3% next year and 7% by 2026. But 69% of participants sees stocks as overpriced for a soft-landing scenario — the most in the 17 months CNBC has asked the question.

"At almost 25 times the price-earnings multiple on consensus-anticipated earnings for the S&P 500, valuation appears fulsome," said Subodh Kumar, president, Subodh Kumar & Co. "Compared to sustained 7% annual long-term earnings growth, current markets appear to be assuming twice as much. … For the S&P 500, operating margins peaked in mid-2021, are in decline and tariffs add to pressures."

The probability of a recession in the next year hit a new two-year low of 29% and nearly 70% forecast a soft landing. Forecasts for gross domestic product inched up for this year and next, with the economy running a bit above potential this year at 2.5% and cooling to 2.1% in 2025 and 2026.

"The labor market is tighter at the start of Trump's second term compared to where it was in November 2016," said John G. Lonski, president of The Lonski Group. "The longer the economy grows faster than 2.5% annualized quarter-to-quarter, the greater is the risk of an inflationary tightening of the U.S. labor market."

Richard Bernstein, founder and CEO of Richard Bernstein Advisors, said, "Financial conditions are remarkably easy, yet the Fed feels it must cut rates. … More inflation than is current consensus seems the ultimate path."