BlackRock: Fed ‘must go on vacation’ after 2022 rate hikes

The Federal Reserve’s rate hikes in 2022 to fight inflation are likely enough to put its officials on hold, limiting the risk of too much tightening damaging the U.S. economy, BlackRock said.

This position was expressed in a note by Rick Reeder, head of fixed income investments at the world’s largest asset manager.

The Fed chairman’s comments “did little to shake our belief that the Fed may raise interest rates by another 75 basis points at the September 21 meeting,” Rinder said after Powell’s speech at Fed conference in Jackson Hole, adding that markets are pricing in rate hikes of another 125 basis points by the end of 2022.

According to the BlackRock executive, another big hike (75bp) would bring the Fed rate to a range of 3% – 3.25%, which is beyond the members’ long-term “neutral rate” estimate of the competent committee of the Bank. It is noted that a neutral interest rate neither fuels nor restricts economic activity.

So pushing rates into a mid-to-high 3% range “will allow the Fed to reach its destination and then relax and watch its policy adjustments pay off,” according to BlackRock.

While it is “absolutely imperative that the Fed get currently high inflation under control, we are concerned that the central bank may overtighten and erase much of the recovery from the pandemic shock,” Reeder points out.

According to him, the post-pandemic wage increase combined with the tight labor market is expected to work positively in favor of lower incomes if the country is past the peak of food and energy price increases.

“Today we are in an environment where corporate investment is slowing and the housing market is freezing, amid higher prices, tighter monetary policy and economic uncertainty. So the Fed by the end of the year will have positioned itself to stand back, just relax like a vacationer and watch how the big changes in the system work,” BlackRock reckons.

It is recalled that in his speech in Jackson Hole on Friday, central banker Jay Powell said that the path to reduce inflation will have “some financial pain” for US households and businesses, stressing that price stability is key to to keep the labor market strong.

Fed rates are currently in the 2.25% – 2.5% range, following two consecutive 0.75% (75 basis point) rate hikes in June and July.

After Powell’s speech, the chance of a third consecutive giant 75 basis point increase has now risen to 70%, as bets on Fed rate futures show, with that for a softer 50bp. to have declined respectively to 30%.