BlackRock: Fed rate hike boosts Kevin Warsh's credibility
Jean Boivin, Head of the BlackRock Investment Institute, responds to the Fed meeting:
Even though the hike was largely expected, it is a big deal. At the start of the year, markets expected the Fed to be easing by now. The overt political pressure for rate cuts, the arrival of a new Fed chair and the approaching midterm elections made a hike difficult to envisage just a few months ago. Yet the FOMC unanimously raised rates.
The macro backdrop – reflected in the Fed’s own projections - has shifted enough to make it hard to justify not hiking. But by following through on the message Warsh delivered at Jackson Hole, the Fed has put action behind its words and helped reestablish the new chair’s credibility. The flattening of the 10s and 30s Treasury curve supports that reading, suggesting the credibility premium investors demanded after July is fading.
Yet we think markets risk overinterpreting the tone of the press conference. Warsh’s emphasis on the economy’s strength was a notable feature of the press conference. Markets took that emphasis as a hawkish signal, with stocks reversing earlier gains and the 10-year Treasury yield moving back above 5% as investors priced in more tightening.
But we think it is important to distinguish the need to safeguard the Fed’s credibility from the start of a sustained hiking cycle. Importantly, a hike that strengthens credibility, against a backdrop of stronger growth, need not be bad news for risk assets.
