BlackRock: Traders’ miscalculations about Fed interest rates are wrong

Strategic analysts at Blackrock, the world’s largest asset manager, have challenged traders who are betting that the Federal Reserve will raise interest rates to around 3% next year, saying the increase will reach 2% but the bank will not go far. above.

In particular, according to Bloomberg, the BlackRock Investment Institute believes that an overly aggressive increase in the fight against the escalating cost of living could have the opposite effect, estimating that a 2% reduction in inflation at the Fed target could push unemployment at almost 10% – based on the historical relationship between inflation and employment.

That is unlikely to be a scenario the Fed is pursuing, which means the bank will eventually “choose to live with inflation,” said Alex Brazier, the institute’s deputy chief executive, noting that inflation is currently more due to its constraints. supply rather than increased demand.

This week’s data showed that US consumer prices rose 8.5% in March, the highest level since 1981. This figure was historically around 40 basis points (0.4%) above the Fed’s preferred inflation measure (Personal Consumer Price Index – PCE) on which its policy objective is based.

According to Bloomberg, BlackRock’s assessment that the Fed “will live with inflation” underscores its “underweight” position in bonds.

According to BlackRock analysts, the so-called neutral interest rate – a level of interest rates that neither stimulates nor restrains the economy – will reach around 2% -2.5%, partly due to the assumption that price increases will soon peak in then it will gradually relax.

The asset manager expects inflation to stabilize at around 3%, which is still higher than the Fed target and the decade average, but without giving a specific time frame for the forecast.

At this stage, the Fed’s market rate estimate was recently at 3.2% for next year, with Goldman Sachs chief economist Jan Hatzius saying last week that the Federal Reserve may need to raise them. and by 4%.

“The market is now pricing based on a scenario in which central banks will not just normalize interest rates – it assumes they will go further and push the monetary brakes,” said Alex Brazier of BlackRock.

According to him, “this is not at all certain because the nature of inflation we have is driven by supply.”

Brazier also noted that the Fed’s latest forecasts confirm the view that the bank is not prepared to destroy demand or the labor market to reduce inflation. It is recalled that while the Fed revised its inflation forecasts, it kept the unemployment rate stable at around 3.5%.

Fears of an aggressive policy tightening by the Fed have sparked a sell-off of bonds, especially in the short term, which had the effect of reversing the yield curve for a while earlier this month.

The reversal of the curve is often seen as a warning sign, as it indicates that the market expects such an increase in interest rates that will “kill” inflation and economic growth along the way.

“Choosing to fight inflation would increase the risk of recession, while living with inflation would simply mean more persistent inflation. And the market is pricing the possibility of the Fed fighting inflation instead of living with inflation,” he said. of the BlackRock Investment Institute.