BlackRock’s Rick Reader expects the Federal Reserve to raise interest rates by a quarter point on Wednesday and then pause. “My sense is that this will be the last hike and that the Fed will allow this rate policy to run through the system to cause a slowdown,” BlackRock’s chief investment officer for global fixed income said in a phone interview. Tuesday kicks off the Fed’s two-day meeting, which will culminate in a revised decision to be announced at 2 p.m. ET on Wednesday. The policy-setting Federal Open Market Committee has been raising rates since March 2022 in an effort to calm soaring prices. Reeder said that while inflation remains an issue, it is coming down. However, he believes that wage inflation remains stubbornly high. “You still have steady work and steady wages, so my sense is that the Fed is going to focus on those issues,” he said. Nor does he think the economy has slowed to a degree that would satisfy the Fed. “I don’t think there is significant pressure on the US economy,” Reeder said. Debt ceiling worries loom Another worry behind the Fed is looming: the lack of progress in Washington on the debt ceiling. Treasury Secretary Janet Yellen warned on Monday that the government could fail to meet its debt obligations as early as June 1 – sooner than expected. President Joe Biden is expected to meet congressional leaders next week. “This moves to a market-first focus on debt and equities, with a very heavy focus on short-term Treasury bill maturities,” said Reeder. He added, “This will be the main source of fluctuations in the markets during the coming weeks, with the intensity of this increasing the longer the process takes, and the more interested parties become.” Reeder said the current uncertainty in the banking sector will continue to play a role in weakening the US economy so that the Fed can stop raising interest rates sooner than it would otherwise. He contends that the banks’ problems will likely save the Fed from having to raise interest rates by another half point. The US 10-year US10Y 1M Mountain Yield has shown relative stability over the past several weeks. The 10-year Treasury yield has been relatively stable in the past six weeks, ranging between 3.2% and 3.6%. Part of the bond market will remain flat, Ridder said, and could migrate closer to 3.7%. However, he believes there will be increased volatility in short-term bonds, such as the two-year Treasury and three-month Treasury bills. Reeder doesn’t expect Fed Chairman Jerome Powell to say much about what will move the stock market. “I think earnings are the main driver for stocks right now,” he said. “The multiples on equities relative to where the debt markets are at right now shows that the equities multiples are very high, but the technicals in the market are as good as I’ve ever seen them.” Ryder is confident about the market in general, but is in the camp that “the economy could spiral into a technical recession.” He sees the Fed cutting interest rates next year. “They will start easing in 2024 as the economy slows, but for now, the focus should be on higher levels of inflation,” he said.
BlackRock’s Rieder highlights a new investor concern beyond an expected Fed rate hike