BlackRock, the world's largest asset management company, said investors who expect the Federal Reserve to significantly lower interest rates this year may be disappointed.
BlackRock strategists point out in their weekly reports that the Federal Reserve may not cut interest rates as expected by the market, as inflation will rebound later this year and a tight labor market will accelerate wage growth.
The company stated that the increase in geopolitical risks will also intensify price pressure in the coming years, reducing the space for the Federal Reserve to relax monetary policy. Geopolitical tensions often affect global commodity supply chains, leading to fluctuations in raw material prices.
In recent months, investors and analysts have been increasing their bets on the US interest rate cut this year, following indications from the Federal Reserve that they are considering easing the monetary environment. UBS predicts that as part of its baseline scenario, the Federal Reserve will cut benchmark borrowing costs four times this year, while NatWest Markets expects the rate cut to exceed 200 basis points.
This expectation drove strong gains in the stock and bond markets in November and December last year, with the S&P 500 index rising 14% during the same period.
Inflation roller coaster
However, according to BlackRock's view, the market may have acted too hastily.
Analysts led by Jean Boivin wrote, "We believe that even if economic growth slows down, the Federal Reserve may not be able to achieve the market's expected rate cuts."
After the Federal Reserve raised interest rates by over 500 basis points, the annual inflation rate in November fell from a 40 year high of over 9.1% in mid-2022 to 3.1%. According to BlackRock, the rate of price increase may further slow down to 2% in the coming quarters, but it will rebound later this year.
BlackRock wrote, "As spending fluctuations caused by the pandemic weaken, the decline in US commodity prices has dragged down inflation. However, from December's employment data, it can be seen that the tense labor market is driving rapid wage growth."
"We believe that this means that as the drag of commodity prices subsides, the inflation rate will return to a level close to 3% by 2025. We believe that geopolitical fragmentation will also exacerbate inflationary pressures in the coming years." The report added.
BlackRock stated that as inflation continues to slow down, the optimistic trend in the stock market may continue in the short term, but once there are signs of price pressure rebounding, this trend may change.