Leonardo Munoz/VIEWpress
- Investors betting on sharp interest-rate cuts this year may be disappointed, according to BlackRock.
- The Fed's ability to cut may be curtailed by a resurgence in inflation, says the world's biggest asset manager.
- Stocks and bonds rallied at the end of 2023 as Wall Street ramped up bets that rates are set to fall.
Investors positioning for sharp interest-rate cuts by the Federal Reserve this year may be disappointed, according to BlackRock.
The central bank probably won't cut rates as markets expect because inflation will rebound later this year with a tight labor market fueling accelerated wage growth, strategists at the world's biggest asset manager said in a weekly note.
Increased geopolitical risks will also fuel price pressures in the coming years, according to BlackRock, reducing room for the Fed to ease monetary policy. Geopolitical tensions tend to affect global commodity supply chains, causing fluctuations in the prices of raw materials.
Investors and analysts have been ramping up bets in recent months for US rate cuts this year, after the Fed signaled it's considering the prospect of loosening monetary conditions.
UBS expects the Fed to lower benchmark borrowing costs four times this year, as part of its base-case scenario, while NatWest Markets predicts more than 200 basis points of reductions.
Such expectations fueled sizzling rallies in both the stock and bond markets in November and December, with the S&P 500 index rising 14% over that period.
Inflation 'rollercoaster'
However, the market may have run a bit ahead of itself, going by BlackRock's view.
"We think the Fed may not be able to deliver the rate cuts markets expect, even with growth moderating," analysts led by Jean Boivin wrote.
Annual inflation declined to 3.1% in November, from a 40-year high of more than 9.1% in mid-2022, after the Fed raised interest rates by more than 500 basis points. The pace of price increases may ease further toward 2% in the coming quarters, but it will rebound later this year, according to BlackRock.
"Falling US goods prices are dragging down inflation as pandemic-driven swings in spending unwind. Yet a tight labor market is driving stubbornly high wage growth, as seen in the December jobs data," the analysts wrote.
"We think that means inflation is set to rollercoaster back up near 3% in 2025 as the goods price drag fades. We see geopolitical fragmentation bolstering inflationary pressures in coming years, too," they added.
The upbeat trend in stocks could continue in the near term as inflation continues to slow for now, but that may change once signs of a resurgence in price pressure appear, according to the asset manager.
The bond market could see increased volatility "as inflation's persistence becomes clearer," the strategists wrote.