BlackRock Strategists Rule Out Fed Rate Cuts in 2023

Strategists at BlackRock have ruled out the possibility of the Federal Reserve cutting interest rates this year, despite recent turmoil in the banking sector and a potential recession ahead.

They write in a commentary that even though Fed data point to a recession coming, the strategists don’t see rate cuts this year, calling that an "old playbook" when central banks would "rush to rescue the economy as recession hit."

The report indicated that the Fed has made it clear that banking issues would not stop them from tightening further. However, the strategists argued that the Fed is underestimating the extent of the problem, saying that inflation will "prove even stickier than the Fed expects without a deep recession."

They noted they are watching inflation data, especially this week’s Personal Consumption Expenditures (PCE) Price Index, as well as consumer confidence for more signs of damage from interest rate hikes, higher prices, and the banking issues.

Where to Invest

BlackRock is recommending clients invest in inflation-linked bonds and short-term government paper for income. They said to move away from long-term government bonds as they anticipate yields rising with "investors demanding more compensation for holding them, or term premium, given persistent and volatile inflation."