BlackRock, the world’s largest money manager, believes that despite the recent market volatility, the Federal Reserve will continue to raise interest rates.
According to BlackRock Investment Institute strategists, including Wei Li, fears of a banking crisis have convulsed the markets, but this time is different. The Fed and other central banks have clarified that banking sector troubles won’t stop their fight against inflation.
The strategists at BlackRock wrote in a client note, “We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as the recession hit.
We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts.” This view contradicts that of TD Securities and DoubleLine Capital LP, who believe that the Fed is mistaken about the need to continue raising interest rates as the risk of recession grows.
BlackRock is retaining an underweight position in developed-market equities. The firm believes that the markets are wrong in expecting imminent US rate cuts as the economy lurches toward a recession.
The collapse of several US banks and Credit Suisse Group AG this month has forced a global rethink on the outlook for monetary policy. It has also triggered the biggest swings in Treasury yields in over a decade.
Yields on US two-year notes, among the most sensitive securities to changes in central-bank policy, rose on Monday from near the lowest levels this year. While investors have returned to pricing in the prospect of a quarter-point Fed hike in May, they are also betting that the markets are not entirely out of the woods yet. There may be around 75 basis points of easing by year-end.
Recent economic data support BlackRock’s view that the Fed may be “underestimating how stubborn inflation is proving due to a tight labor market.” US core consumer prices rose in February, and research from the New York Fed suggests that inflation will likely stick around longer than expected.
BlackRock strategists believe that the Fed could only deliver the rate cuts priced in by the markets if a more severe credit crunch took hold and caused an even deeper recession than they expected.
Therefore, BlackRock continues to advocate for holding inflation-linked bonds to protect against rising prices while anticipating a new, more nuanced phase of curbing inflation.