BlackRock’s Senior Macro Investment Strategy for iShares EMEA Laura Cooper expects the Federal Reserve (Fed) chair Jerome Powell to pause hikes at the next Open Markets Committee Meeting. The announcement will also keep the door open for future hikes while continuing the chairman’s rhetoric about economic data’s role in future decisions.
According to Cooper, rates will likely stay in “restrictive” territory until mid-2024 before the central bank recalibrates rates “towards neutral.”
“Despite signs of disinflation becoming firmly entrenched, price pressures are likely to settle above the [Fed’s] 2% target.”
Fed Unlikely to Cut Rates Unless Economy Deteriorates
BlackRock’s head of Global Fundamental Income Strategy, Marilyn Watson, agreed that the Fed is unlikely to change rates this year. For that to happen, the central bank would need to see a deterioration in the economy, lower gross domestic product, and a lower unemployment rate.
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“We’re just not really seeing that in terms of the data. We expect [interest rates] to remain pretty much the same for this year… The question is whether we could see an adjustment to that, but… I think its again, next year.”
Since March 2022, the Federal Reserve has increased interest rates 11 times to fight soaring US inflation. Its Open Markets Committee kicked off a two-day meeting on Tuesday to decide whether it will raise or pause hikes.
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The Fed is expected to release a so-called “dot plot” graphic containing officials’ interest rate predictions. Roughly 40% of economists recently surveyed by the Financial Times predict the bank will raise rates by 25 basis points at this week’s meeting.
Junk Bond Issuance Surges Amid High Interest Rates
BlackRock’s Amanda Lynam said the persistence of high interest rates would likely cause companies to issue more junk bonds to raise money. In September, the amount of leveraged loans and junk bonds companies issued rose to $40 billion.
Lynam, BlackRock’s Head of Macro Credit Research within the Portfolio Management Group – Private Debt, says that corporations are not expecting the Fed to reduce interest rates, so this could be as good a time as any for debt financing.
“I think corporates are coming around to the idea that debt financing costs might not be any better, really, later this year or into early 2024.”
Companies must pay investors interest and eventually the principal at the end of the maturation period. So far, the rate of defaults has been low, Lynam noted.