BlackRock expects Fed to raise rates

The Federal Reserve wants to raise interest rates one to two more times in 2019 and will do so if inflation gathers steam, BlackRock’s Rick Rieder says.

Rieder, who is chief investment officer of global fixed income for the world’s largest fund manager, said markets expect the Fed’s next move on rates will be to cut them.

Many investors are predicting a recession by 2020 with limited basis for such a claim, he said. “The Fed would still like to get a hike or two done,” according to Rieder. “The markets’ interpretation is a bit extreme.”

Rieder’s views about the Fed and financial markets are widely followed. BlackRock managed $5.98-trillion at the end of 2018, with a third of that in bonds. Rieder sits on the New York Fed’s investor advisory committee on financial markets.

In a sharp reversal of his stance in December, Fed chair Jerome Powell said last week that the Fed has “the luxury of patience” in deciding whether to raise rates again.

Futures tied to the federal funds rate are pricing in a 13% chance of one or more cuts by next January, compared to a nearly 8% chance of hikes.

Rieder has argued since October that the Fed could, should and would pause rate hikes given tame inflation. At the time the view was not common. But the second half of the year often delivers stronger economic data and could open a window for hikes in time for policy meetings in June, September or December, he said.

The Fed is shrinking its cache of bonds bought after the 2008 financial crisis to spur lending and investment, and central bankers signalled last week that the asset-shedding operation could end sooner than previously thought. The Fed’s balance sheet is down to $4.1-trillion from a peak of $4.5-trillion.

Rieder said the Fed should move to end its reduction of bonds. “While $4-trillion sounds like a very big number, the US economy is a very big number,” he said.