BlackRock: Smaller interest rate hikes Fed, but only if inflation data permit

BlackRock: Smaller interest rate hikes Fed, but only if inflation data permit

November 3, 2022

Interest Rates United States Fed
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Below are the comments from Rick Rieder, BlackRock's Chief Investment Officer for Global Fixed Income, on the Federal Reserve's interest rate hike.

The Fed has moved in 75 basis point (bps) increments four times this year to get to a sought-after policy destination very quickly. Yet, the destination seems to have moved further away with each subsequent elevated inflation print, and with employment in the country remaining very tight.

Hence, while moving the Federal Funds rate at a very fast 75 bps increment seemed almost inconceivable several months ago, especially as the Fed was still undertaking quantitative easing (QE) in March, we have become used to this extraordinary increment. That’s because the Fed needed to get interest rates (and liquidity) from levels that were very accommodative (overly so) to a place that is finally approaching restrictive, over the span of a few months.

The persistent stickiness of elevated levels of inflation has forced the Fed to make '75 bps speed' a necessary and consistent path toward its primary goal of reducing inflation.

However, moving at a 75-bps clip now seems to be a question given how far the Fed has already moved at this point, and with the market pricing the terminal funds rate at about 5%, which is roughly consistent with the Chair’s comment of 'higher levels' than they thought at the September meeting, which showed a median expectation of 4.6% for 2023 at the time.

We think the beating that the markets have experienced this year may now be executed with a lower level of intensity than before, as the Fed approaches a clearly restrictive interest rate for the economy (while still draining liquidity by reducing the size of its balance sheet).

That’s partly because we’ve been experiencing a dynamic in markets whereby each data point associated with potential policy movement (nonfarm payrolls, CPI releases and, of course, FOMC meetings) have added an ‘event premia’ to already fairly volatile market moves.

When the Fed makes the transition we have described, and as inflation eases back toward more normal levels, this added market volatility should abate over the coming months. Still, markets (as well as the inflation condition) should still consider this Fed as very serious, and willing to move more aggressively, if need be, over the coming months.

Our sense, though, is that the momentum of inflation, and hiring, will moderate lower from here, and consequently so will the Fed’s pace of policy tightening, but the Fed clearly has to see that data first.

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