- The risk that the Fed’s rate hikes could trigger a recession prompted BlackRock to downgrade US stocks on Monday.
- “It’s hard to see a perfect result,” BlackRock said.
- The Fed plans to raise the fed funds rate by 50 basis points at each of its upcoming meetings.
is caught between a rock and a hard place as he tries to balance rising interest rates with 40-year highs in inflation and the potential of an economy
The difficult position the Fed finds itself in prompted BlackRock, the world’s largest asset manager with nearly $10 trillion under management, to downgrade US stocks to “neutral” on Monday.
“The Fed’s aggressive turn has increased the risk that markets will see rates remain in tightening territory. The year-to-date sell-off reflects this in part, but we don’t see a clear catalyst for a rally,” he said. BlackRock. “If they raise interest rates too much, they risk triggering a recession. If they don’t tighten enough, the risk becomes runaway inflation. It’s hard to see a perfect outcome.”
And Fed Chairman Jerome Powell’s recent aggressive comments last week indicate that the Fed will do whatever it takes to stem the continued rise in inflation as it still sees a strong labor market and a resilient consumer that will survive a series of rate increases.
The Fed is expected to raise the fed funds rate by 50 basis points at its next two meetings this summer. The Fed raised interest rates for the first time by 50 basis points earlier this month, marking the first time it has raised rates by that much since 2000.
That rapid pace of rate hikes by the Fed, combined with plans to reduce its balance sheet starting next month, means it will be harder for central banks to come to the rescue and stop slowing economic growth by cutting rates. interest rates and buying assets as it has done in previous periods of economic downturn, BlackRock said.
The misconfiguration of stocks with the Fed’s monetary tightening plans is also compounded by high commodity prices due to the ongoing conflict between Russia and Ukraine and the recent COVID-induced slowdown in China.
“We expect the deteriorating economic outlook for China to be a drag on global growth, and we believe the consensus forecast for China’s GDP growth in 2022 is likely to be revised down,” BlackRock said.
Ultimately, the only catalyst that would reverse BlackRock’s view of equities and return to an overweight view of US equities is if the Fed makes a dovish turn, only possible if inflation cools quickly.
And according to Fundstrat’s Tom Lee, that could happen as a recent spike in layoffs and a slowdown in new job openings could help rein in wage inflation, which is a central driver of headline inflation readings.