By Joy Wiltermuth
The Federal Reserve’s battle to get inflation down from a 40-year high likely means it will raise interest rates until the U.S. economy slows, strategists at the BlackRock Investment Institute warned on Tuesday.
“The Fed seems dead set on raising rates this year to levels that, in our view, would clearly slow the economy,” Jean Boivin, head of the BlackRock Institute, and his team of strategists wrote, in a Tuesday note.
Chairman Jerome Powell last week raised the central bank’s policy rate by 75 basis points — i ts biggest rate hike in almost three decades — while signaling a willingness to raise its benchmark rate to nearly 4% next year, even as the Fed has revised its economic growth forecasts lower (see chart) in recent months.
The central bank “seems to be responding to the ‘politics’ of current high inflation,” with its focus on “overheating demand,” rather than the “unusually low production capacity” due to an “incomplete” pandemic restart, Boivin’s team wrote.
BlackRock Inc. /zigman2/quotes/207946232/composite BLK +0.17% , the world’s largest asset manager, already twice this year reduced portfolio risk, given “growing concerns over the effect of the energy /zigman2/quotes/209723049/delayed CL00 +0.64% crunch on growth and central banks overtightening,” Boivin said.
“This is why we don’t see the risk asset retreat as a reason to buy the dip — and expect more volatility ahead.”
Equity strategists at Morgan Stanley /zigman2/quotes/209104354/composite MS -0.22% and Goldman Sachs /zigman2/quotes/209237603/composite GS -0.25% were among a chorus of major investment banks to warn on Tuesday that the U.S. stock market wasn’t fully pricing in a recession.
RBC Capital Markets /zigman2/quotes/206088494/composite RY +1.17% also noted the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.19% tends to lose one-third of its value, on average, around a recession, which could still pull the index down to about 3,500, from roughly its 3,770 level Tuesday.
Stocks pushed higher Tuesday to kick off summer, but the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.71% still was off 16% on the year so far, the S&P 500 down about 21% and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.19% off 29% to start 2022.
Much of the $53 trillion U.S. fixed income markets also has been having a historically bad year , with total returns deeply in negative territory.