BlackRock's Rick Rieder eyes potential Fed 'split' on whether to do more rate hikes in 2023

By Christine Idzelis

'Personally, I don't think they need to do any more' rate increases, says Rieder

While the Federal Reserve might like to get another interest rate hike in later this year, BlackRock's Rick Rieder thinks the Fed has done enough.

The central bank is scheduled to release its policy statement on interest rates along with a summary of its economic projections on Wednesday at 2 p.m. Eastern Time, with investors widely expecting it will keep its benchmark interest rate steady at the current 22-year high.

But the Fed could do one more rate hike at its November meeting as it seeks to stomp out inflation that's too high even after decelerating over the past year, with some members of its committee potentially viewing such a move as "another insurance policy," according to Rieder, BlackRock's chief investment officer of global fixed income and head of the firm's global allocation investment team.

"I think they'd like to get one more in," Rieder said by phone, although he also thinks there may be "a real split on the committee," saying that it will be "interesting to see how that's described."

In Rieder's view, the Fed should stop hiking rates as "you're seeing a pretty significant downshift in inflation," while employment is starting to slow, following the central bank's monetary tightening. The Fed began lifting its benchmark rate from near zero in March 2022, followed by a series of rapid rate hikes that took it to the current target range of 5.25% to 5.5%.

"Personally, I don't think they need to do any more," he said. "They've done a lot."

While some investors have worried the central bank risks overtightening its monetary policy and unnecessarily triggering a deep recession, Fed Chair Powell has been trying to engineer a soft landing for the economy. That means slowing it enough to cool inflation without causing an economic downturn.

Meanwhile, U.S. economic growth is moderating and three-month moving averages for inflation point to it being "dramatically down" from peak levels, Rieder said. He cited core data from the consumer-price index, which excludes energy and food prices, as one example.

Core CPI has fallen to 2.4% on a three-month annualized basis, from 6.9% in June 2022, according to Rieder. That compares with the Fed's inflation target of 2%.

He expects Chair Powell will reiterate that the central bank is proceeding "carefully" as the Fed evaluates economic data to determine whether another rate hike will be needed or not.

The market probably wants to hear that the Fed is data dependent while looking to get a sense for how much progress it has made so far in its goal of taming inflation, according to Rieder.

Although the U.S. economy has been resilient, "job openings are slowing in a very significant way" while consumers are showing some cracks as credit-card balances are growing and their accumulated savings are coming down, he said. People with lower incomes who are borrowers tend to see more intense pressure from higher interest rates, he said.

Read: Credit-card debt hits $1 trillion -- that milestone comes at a very tricky time

In the stock market, some retailers have fallen under pressure lately.

Macy's Inc. last month reported a loss in its second quarter and a decline in sales. "In light of ongoing macroeconomic pressures and uncertainty on when those will abate, the company continues to take a cautious approach on the consumer," Macy's said Aug. 22 in its earnings announcement.

Meanwhile, equity analysts at JPMorgan Chase & Co. on Wednesday downgraded their rating of discount retailer Dollar General Corp., whose second quarter-earnings were weaker than expected, to "underweight" from "neutral" amid worries the company's core "low-end consumer" is already acting "recessionary."

Shares of Dollar General (DG) have plunged 53.3% this year through Tuesday, while Macy's stock (M) is down 47.1% this year over the same period, FactSet data show.

More broadly, the U.S. stock market has declined this month, with the S&P 500 SPX slumping 1.4% in September through Tuesday, as investors turn their attention to Chair Powell.

Powell's press conference is scheduled to begin at 2:30 p.m. Eastern Time on Wednesday, with traders looking for clues as to how long the Fed might keep rates elevated.

'You can walk into it'

Rieder said he expects the Fed may lower rates in the second half of next year and that markets may have been "overenthusiastic" in anticipating a cut could happen in the first quarter of 2024.

As for where to invest in the bond market, the short-end of the Treasury market's yield curve, where the so-called risk-free rate has been more than 5%, has appeared attractive to Rieder.

But "I like very slowly adding out to the three-to-five year part of the yield curve," he said.

Six-month Treasury bills BX:TMUBMUSD06M were yielding around 5.53% on Wednesday morning, according to FactSet data, at last check. The yield on the 2-year Treasury note BX:TMUBMUSD02Y was down about six basis points in Wednesday morning trading at around 5.05%, while 10-year Treasury yields BX:TMUBMUSD10Y fell three basis points to around 4.33%.

People may scramble to lock in yields beyond the ultra-short end of the yield curve should they see the Fed cutting rates next year, said Rieder, adding that locking in some longer-term yields today makes some sense.

"But you can walk into it," he said. "You don't need to run."

-Christine Idzelis

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09-20-23 0929ET

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