© Reuters.
Investing.com – The world’s largest asset manager, BlackRock, said it will continue to raise even though traders are betting otherwise.
The world’s largest money manager favors inflation-linked bonds – securities that protect against price hikes – as he bets that markets are wrong in their predictions that the Federal Reserve will start cutting rates amid fears the economy is headed for recession.
This time is different. The Fed and its peers have made clear that the problems plaguing the banking sector will not stop their fight against inflation, BlackRock Investment Institute strategists wrote in a note to clients.
Recent economic data gives credence to BlackRock’s view after core inflation rose in the US in February, while data from the Federal Reserve Bank of New York showed that inflation will remain elevated for longer than previously expected.
The Federal Reserve raised rates last Wednesday for the ninth consecutive meeting by 0.25% to the highest level since 2007.
The strategists at “BlackRock” added: “We do not expect a reduction in interest rates this year, as this is the traditional approach used when central banks try to curb inflation while saving the economy from a recession, and we expect a new phase characterized by greater clarity to curb future inflation and witness increases at a slower pace.” But there will be no interest rate cuts.”
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Conflict of expectations
BlackRock’s view contrasts with that of TD Securities and DoubleLine Capital LP, which say the Fed is wrong about the need to keep raising rates as recession risks grow. The collapse of several US banks and the Credit Suisse group this month forces a global rethinking of monetary policy expectations, while triggering the biggest swings in yields in more than a decade.
Yields on US two-year Treasury bonds – among the most sensitive to monetary policy – jumped on Monday from near the lowest levels this year, as fear of contagion receded in the banking sector.
At the same time, investors have returned to expecting a quarter-point increase by the US Federal Reserve at its next meeting, they are also betting that the markets have not completely passed the danger stage, and monetary policy may be eased by approximately 75 basis points by the end of the current year.
Recent economic data lends credence to BlackRock’s view that the Fed may “underestimate the resilience of inflation to the labor market deficit”. Core inflation rose in the US in February, while research from the Federal Reserve Bank of New York found that inflation appeared poised to stick around for longer than previously expected.
“We believe the Fed can only deliver market-priced rate cuts if a more serious credit crunch takes hold and causes a deeper recession than we expect,” said BlackRock strategists.
