BlackRock: Fed rate hike could cause more volatility

BlackRock: Fed rate hike could cause more volatility

September 19, 2024

Interest Rates Fed
Fed dollar (kreatikar, Pixabay)

Jean Boivin, Head of the BlackRock Investment Institute, responds to the Fed's rate cut.

'The Federal Reserve opted for a 50-basis-point rate cut at its meeting today, in what it described as a 'recalibration' of policy. The cut was motivated by the Fed’s assessment that the 'economy is solid', the risks to the growth and inflation outlook have now 'come into balance' and that it is not behind the curve.

So, why 50 basis points and not 25? The simple explanation might come down to Fed Chair Powell’s comment: the economy is 'growing at a solid pace… We want to keep it there'. But that suggests that rather than risks being balanced, the Fed is more concerned about growth slowing too much.

There was no explicit acknowledgement of the risk of inflation resurging. Notably, there was no mention of growth being boosted by easy financial conditions that have got easier this year – a highly unusual situation when policy is supposed to be restrictive. This underscores our view that this is far from a normal business cycle.

For us, today’s meeting was reminiscent of December 2023, when the Fed reinforced already aggressive market expectations of policy cuts. Today’s move was a surprise and could be positive for markets in the near term, but we think it raises the prospects of further volatility ahead, especially if growth and inflation don’t pan out in line with the soft landing in the Fed’s updated projections. And given what is an extremely uncertain outlook and the divided opinions before the Fed’s blackout period, the near unanimity on today’s decision is perhaps more surprising than the one dissent.

Fed Chair Powell did use the word “recalibration” to characterize the policy decision. That could be the word he points back to if the Fed pauses rate cuts and it becomes clear this will not be a full-blown easing cycle. We still think market rate cut expectations will ultimately be disappointed and the positive news will instead come from resilient growth.'

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