BlackRock, the world’s leading asset manager, has reduced the likelihood of a 50-basis-point (0.50%) rate cut by the Federal Reserve. The organization stated that current market expectations for deep rate cuts are “overdone.” In its latest “Global Weekly Commentary,” the firm noted that while the Federal Reserve is set to begin cutting interest rates for the first time since the pandemic, a 0.50% cut seems unlikely due to inflation pressures. Such a move could exacerbate the ongoing bearish trend in the cryptocurrency market.
BlackRock’s Commentary On Upcoming Fed Rate Cuts
The report states, “The recent drop in U.S. core CPI stalled in August, likely taking a 50-basis-point cut off the table, in our view.” This indicates that while inflation has been slowing, the pace is not sufficient to justify such a significant rate reduction at this time. Therefore, BlackRock advises caution, warning that inflation remains “sticky” and that central banks will not have an easy path to loosening monetary policy.
Recently, markets have been pricing in sharp rate cuts following the Federal Reserve’s rapid interest rate hikes over the past two years. However, BlackRock argues that these expectations are misplaced. According to the report, “Markets expect the Fed to cut rates sharply – and we think this pricing is overdone.”
Moreover, the asset manager points to structural issues such as a tight labor market and ongoing fiscal stimulus, which are keeping inflation elevated. This means that while rate cuts are coming, they will not be as deep as markets have been anticipating.
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In addition, the asset manager emphasizes that the current economic environment is quite different from past recessions, where deep cuts in response to economic downturns were common. The report highlights, “Central banks face a sharper trade-off between curbing inflation and protecting growth than in the decades-long period of steady growth and inflation.”
Forward-Looking Opinion On Economy
While recession fears have risen, BlackRock remains optimistic about the U.S. economy, noting that fears of an economic contraction are likely overblown. “We see inflation staying sticky due to loose fiscal policy and the impact of mega forces,” the report says. It also references demographic changes and geopolitical factors that are contributing to sustained inflationary pressures.
On the market front, BlackRock remains bullish on U.S. equities, particularly those benefiting from advancements in artificial intelligence. This comes after the U.S. stock market rose by 4% last week, led by the tech sector. Despite inflation challenges, the organization maintains an overweight position on U.S. stocks. The asset manager also noted that inflationary pressures are helping cool services inflation, which has been a key driver of price increases in recent years.
On the other hand, JPMorgan is optimistic on a 50 bps Fed rate. Also, the CME FedWatch tool indicates a whopping 65% probability off a 0.50% interest rate cut during the Federal Reserve Open Committee (FOMC) meeting on Wednesday, September 18. Moreover, Democratic senators, including Elizabeth Warren are even demanding a 75 bps rate cut.
However, in case of no rate cuts or a 0.25% reduction in interest rates, the crypto bear market may persist. In addition, the stock market could also bear the brunt as market expectations won’t be met.
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