Source: Wall Street News
Author: Zhou Xiaowen
BlackRock, the world's largest asset manager, believes that although the market expects the Fed to cut interest rates, the Fed may not actually do so.
This week, Wei Li, a strategist at BlackRock Economics, noted in a client note that the Fed won’t stop fighting inflation because of the banks’ woes, instead they will enter a “more subtle” phase of less confrontation but still not Will cut interest rates.
Rushing to cut rates to save the economy when a recession hits is a “old tactic” for central banks, but they don’t expect it to happen this year, the firm’s strategists wrote in a note:
This damage is paramount now, and central banks are finally being forced to confront it. In our view, this means that they will enter a new phase of containing inflation, which we have been worried about.
We are seeing major central banks shifting away from their 'whatever it takes' approach to a more nuanced phase of less confrontation but still no rate cuts.
In addition, BlackRock does not expect the Fed to successfully fight inflation unless there is a severe recession. That's why the firm recommends inflation-linked bonds, which provide some protection for investors from inflation. BlackRock also said that ultra-short-dated government bonds are attractive given that the market is likely to quickly digest the impact of rate cuts.
BlackRock added that the firm has short positions in developed equity markets.
Despite a series of huge shocks in the European and American banking industries this month, the Federal Reserve still announced a 25 basis point interest rate hike last week, expressing its firm attitude to fight inflation. TD Securities believes this move to continue raising rates amid heightened recession risks is a mistake.
This week, First Citizens Bank announced the acquisition of Silicon Valley Bank, the market's concerns surrounding the banking industry have eased, and the two-year U.S. bond yield continued to rise, after falling to its lowest level this year.
Swaps showed investors had re-priced expectations for a 25-basis-point rate hike by the Fed in May, but they were also betting the market wasn't out of the woods yet, with a hike of around 65 basis points likely by year-end.
Meanwhile, the U.S. core CPI continued to rise in February, and BlackRock believes that recent economic data confirms that the Fed may be "underestimating the stubbornness of inflation driven by tight labor markets":
In our view, the rate cuts already priced in by the market are only likely to be implemented if a more severe credit crisis develops and leads to a deeper recession than we expect.
