This is a situation that could be scary for some buyers. The stock market is close to an all-time high, and the Federal Reserve is thinking about cutting interest rates even more than usual. This makes people wonder if officials are worried about the economy.
He said over the phone, “I don’t think a recession is anywhere near in sight.” Rick Rieder is the chief investment officer of global fixed income at BlackRock and leads the firm’s global allocation investment team. As the economy slows down, it is still in pretty good shape.
After keeping rates high to control inflation that rose in the U.S. during the COVID-19 pandemic, the Fed is about to lower them. Since then, inflation has gone down. The Federal Reserve has started its easing cycle with a big half-point cut in the past because of fears of a recession or financial crisis, but Rieder says that a cut that big wouldn’t necessarily mean that one is coming now.
Investors are waiting for the Federal Reserve to decide on Wednesday where to set interest rates. They have been going back and forth recently about whether they think rates will be cut by a quarter point or a half point. The market thinks that a 50 basis-point cut is more likely to happen this week.
Rieder said, “It’s a toss-up whether they do 25 or 50, even though I think they should do 50.” But the way the market has recently priced in rate cuts could make it “easier for the Fed to just do it,” he said. “The markets will be let down if it’s only a 25-basis-point cut now.”
When the U.S. stock market closed on Monday, the Dow Jones Industrial Average DJIA 0.92% hit a new all-time high. Stats from FactSet show that on Tuesday, the S&P 500 SPX 1.60% briefly moved above its record closing high, which was set on July 16. It then ended the day almost flat.
The CME FedWatch Tool last checked and found that buyers in Fed-funds futures on Tuesday thought there was a 65% chance the Fed would decide to lower its policy rate by 50 basis points and a 35% chance of a 25 basis-point cut. Traders thought that rates might go down by 125 basis points, or 1.25 percentage points, by the end of the year.
The market has moved very quickly,” Rieder said of the hopes for a rate cut.
If the Fed decides to cut rates by 25 or 50 basis points on Wednesday, Rieder says it will be more important for them to say how quickly they might move the federal funds rate to 4% or below. He said that based on the most recent economic figures, the market is likely pricing in bigger rate cuts through 2024 than the Fed may be planning.
Rieder says that any changes the Fed makes to its policy statement will be a “big focus” for the markets. These changes will affect how fast rates could be lowered and how the Fed talks about the risks to its inflation and job goals.
He said that after the recent rise in the U.S. jobless rate, markets will be watching to see how worried Fed Chair Jerome Powell seems about the job market. If Powell seems more worried, it could mean that the Fed will cut rates more quickly.
The Federal Reserve will share its policy statement and a “dot plot” of its economic projections on Wednesday. The dot plot shows the rate predictions of different Fed officials.
In June, a summary of economic predictions showed that by the end of 2024, the fed-funds rate was expected to be 5.1% on average. The Federal Reserve has kept its benchmark rate high since July 2023, when it was raised several times to fight high inflation. It is now at a goal range of 5.25% to 5.5%.
It will be very important how much they move their dots down, Rieder said. For Fed officials to be clear about how many rate cuts they expect and how fast the central bank thinks they can happen, it “is going to be really important,” he said.
Bond prices have gone down this month because people think the Fed will cut rates. Dow Jones Market Data says that the yield on the 10-year Treasury note TMUBMUSD10Y 3.735% dropped to 3.622% on Monday. This is the lowest number since June 2023 at 3 p.m. Eastern time. The yield on the two-year Treasury note TMUBMUSD02Y dropped from 3.602% to 3.554%, which is the lowest level since September 2022.
As Rieder says, the Fed’s current benchmark rate is the “wrong price,” or too high, since inflation in the U.S. is “certainly” heading toward, if not at or through, its 2% goal.
He used the personal-consumption-expenditures price index as an example, which is the Fed’s favorite measure. He said that core PCE, which doesn’t include food and energy costs, is down to 1.7% over the last three months.
Rieder thought that the Fed’s half-point rate cut on Wednesday would be a “recalibration” of its monetary policy because the policy rate was too high compared to what “equilibrium” should be because inflation had slowed down a lot. “If you were setting the fed-funds rate for today’s economy, it would easily be” 100 to 200 basis points less than it is now, he stressed.
Since Rieder doesn’t think there will be a recession soon, he has set up the BlackRock Flexible Income ETF BINC 0.16%, an exchange-traded fund that he personally runs, to invest in fixed-income markets around the world, with a lot of exposure to high-yield bonds.
