The Federal Reserve is unlikely to cut interest rates this year despite recent turmoil within the banking sector, according to BlackRock strategists, disappointing investors who are heavily betting on such a scenario.
"We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit," BlackRock said in its weekly note to clients. "Now they’re causing the recession to fight sticky inflation and that makes rate cuts unlikely, in our view."
The note comes shortly after Fed officials delivered another quarter-percentage point rate hike, lifting the benchmark funds rate to a range of 4.75% to 5%, the highest since 2007. It marked the ninth consecutive rate increase aimed at combating high inflation.
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Market pricing indicates that central bankers will approve another quarter-percentage point rate hike at their May meeting, according to the CME Group's FedWatch Group. But traders expect the Fed to pivot and start reducing the federal funds rate as soon as July, eventually trimming as much as a full percentage point by the end of the year.
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Fed officials have been adamant that they are not considering slashing rates this year, even though the rapid rise in interest rates played a direct role in the spate of bank collapses earlier in March.
"Participants expect relatively slow growth, a gradual rebalancing of supply and demand in the labor market, with inflation moving down gradually," Fed Chairman Jerome Powell told reporters in Washington last week. "In that most likely case, if that happens, participants don’t see rate cuts this year. They just don’t."
BlackRock – which manages about $10 trillion in assets – said there are still signs of price pressures within the economy, noting that inflation is "still not on track" to settle at the Fed's 2% target. The Labor Department reported earlier this month that the consumer price index climbed 0.4% in February from the previous month and 6% on an annual basis – about three times the pre-pandemic average.
Core prices, meanwhile, rose faster than expected, climbing 0.5% over the course of February.
"We think the Fed could only deliver the rate cuts priced in by markets if a more serious credit crunch took hold and caused an even deeper recession than we expect," the strategists wrote.
Fed policymakers said it is too soon to say how banking sector stress will affect the broader economy.
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"Financial conditions seem to have tightened and probably by more than the traditional indexes say," Powell said. "The question for us, though, is how significant will that be – what will be the extent of it, and what will be the duration of it?
"We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And, if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions."
