BlackRock: Fed May Not Stop Climbing Until Rates Hit 6%
The Federal Reserve may not stop raising interest rates until they reach a level last seen at the height of the dotcom bubble, the world’s largest asset manager has warned.
Rick Rieder, Chief Investment Officer of Global Fixed Income at black rocksaid the U.S. overnight lending rate could hit its highest since January 2001 due to a surprisingly tight labor market characterized by the growth of the low-wage service sector.
The BlackRock chief executive added that there were signs that goods inflation was proving more tenacious than believed, citing a Manheim used car price index which saw its third consecutive month-over-month increase.
With about $8.6 trillion of assets under management, BlackRock is the world leader in the sector Avant-garde.
“With the strength of the payroll that we have witnessed and the stickiness of inflation, we think there is a reasonable chance that the Fed will have to bring the fed funds rate down to 6% and then hold it for a while. prolonged period to slow the economy and bring inflation down to nearly 2%,” Rieder posted on Twitter Wednesday.
At this level, it would place it well above the 5.4% recorded by the personal consumption expenditure index (PCE), the Fed’s favorite inflation indicator.
This means that borrowing rates would have a dampening effect on the economy since interest payments on debt would eclipse the rate at which money naturally depreciates.
Rieder’s prediction of 6% would mark the second-highest terminal rate for a fed funds tightening cycle this century, if true.
This would place it ahead of the June 2006 mark but behind the 6.5% recorded since May 2000when the internet stock market bubble peaked with America Online’s earlier acquisition of Time Warner for $165 billion.
The agreement remains to this day the largest ever recorded in U.S. history.
Has post-pandemic revenge spending been exhausted?
Rieder’s Wednesday forecast comes after Fed Chairman Jay Powell warned that overnight borrowing costs are likely to be higher than expected.
Markets reacted quickly to Powell’s warmongering commentsleading to lower equity markets and a sharp rise in two-year Treasury yields.
The result has been a yield curve that has become more inverted than at any time since 1981 – a clear indicator of a impending recession.
BlackRock’s Rieder argued that the Fed’s path is more complicated than most thought, as U.S. businesses demonstrate flexibility and resilience previously considered impossible.
However, many investors fear revenge spending the aftermath of the pandemic has exhausted the American consumer and could plunge the economy into recession.
Total accumulated credit card debt reached a new record of 986 billion dollars at the end of December.
With rising interest rates, it’s not just the average household that can find it difficult to meet their monthly payments go forward.
The federal government also faces higher costs to finance its budget deficit.
Net interest payments in fiscal year 2022 hit $475 billion, a record in nominal terms, according to the Peter Peterson Foundation.
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