BlackRock issues a warning to central banks that, with their aggressive rate hikesare continuing their fight against inflation: “More than saving the economy, they are causing recessions”, is the sentence that comes from the strategists of the American asset management giant.
“We find ourselves in a new world, shaped by supply. Major changes in spending and the presence of production limits are triggering inflation. The limits (to production) have their roots in the pandemic and were then exacerbated by the energy shock (caused by the war in Ukraine unleashed by Russia) and from China’s lockdowns“, reads the note from BlackRock. Then he writes it without mincing words. “We are in a new macro regime where central banks, instead of bailing out the economy, are causing recessions. This is clear, looking at the path of interest rates of the main central banks, oriented to excessive monetary tightening against inflation“.
BlackRock also does not see the intention of central banks to cut rates sooner or later to repair the damage caused by too aggressive monetary tightening.
“We believe central banks will eventually stand still, but not cut rates in the face of the damage caused by sharp rate hikes. And at that point the reality of the recession could come or a financial crash, like the one that occurred in the United Kingdom, could arise “.
From what BlackRock writes, it emerges that the view of an inflation caused more by the dynamics relating to supply than by the solidity of demand and consumer spending it refers to both the Eurozone and the United States.
Surely many would object to this, given that there are several economists and strategists who believe that the genesis of flare-ups of inflation in the euro area and in the USA are of an entirely different nature.
On Jerome Powell’s Fed, BlackRock recalled that “The Federal Reserve has signaled its intention to hike rates higher than originally planned, albeit at a slower pace”.
That’s what he actually said central banker Jerome Powell himself in the conference following the announcement on US rates on November 2 last year:
“The time to slow the pace of (rate) hikes could come at the next meeting or the next,” Powell said. Of this moment, he specified the Fed helmsman, “it will be discussed at the next meeting”. (the imminent one in December, which will see the FOMC meet for two days, on 13 and 14 December).
Powell also said, unleashing anxiety on the US terminal rate, that “the consumer price index (CPI) and labor market data” suggest that the “Terminal rate will be higher than previously forecast”. And that, in summary, would be “premature” talk about a pause in the rate hike phase.
Among other things, the president of the Federal Reserve does not even believe that the rate hikes have been excessive: “I’m happy that we moved as fast as we did – he said, recalling that, since March, rates have been raised by 3.75 percentage points – e I don’t think we raised rates too much”. On the contrary: “We still have work to do.”
It is also true, however, that Powell’s statements came before the release of the US CPI index for October which kicked off a powerful Wall Street rally, dampening speculation about further 75 basis point rate hikes.
However, last week, he thought about it St Louis Fed Chairman James Bullard dashing the hopes of those who had begun to expect less aggressive rate hikes by the Federal Reserve.
“Rates are not yet in an area where they can be considered restrictive enough Bullard said. The change in monetary policy appears to have only limited the effects of inflation, but markets are pricing in disinflation in 2023.”the Fed official added.
James Bullard would consider it appropriate a range of US fed funds rates between 5% and 7%, much higher than the markets are pricing.
And if Bullard’s 7% rates scare, let alone Lindsey Piegza’s prediction, chief economist at the financial firm Stifel, which does not rule out rates above 7%.
Based on complicated calculations that also affect economic growth, Piegza, according to the TheStreet.com websiteemerged the “potential need” to bring fed funds rates up all’8%-9%.
“The recent improvement in inflationary pressures, easing from their peaks, has blinded many investors to the Fed’s need to continue on its rate hike path.”Piezga said.
The economist admitted that the recent data relating to the consumer price index, rising in October on an annual basis by 7.7%, represents an improvement over the +8.2% in September.
Ma “it is by no means anything to celebrate, nor is it a clear sign of a Fed ready to adopt a more accommodative policy, given that the 2% inflation target remains a distant target“.
Last November 2, the Fed raised rates by 75 basis points for the fourth time in a row, bringing them from the range of 3% to 3.25% to the new range between 3.75% and 4%, a record value since 2008.
On the ECB, BlackRock believes that the central bank of the euro area will continue to normalize monetary policy, but, also, that the change of tone suggests that the intensity of monetary tightening could decrease (no more rate hikes of 75 basis points, starting with the next Governing Council meeting in December, but 50 basis points).
Said this, “We believe that the ECB is still raising rates, driving the economy into recession”: a recession that will eventually be triggered in the Eurozone by both the energy shock and central bank monetary tightening.
Among other things, the voice of the hawks has certainly not been lacking in recent days.
Among the latest, that ofBoard member Robert Holzmann, governor of the central bank of Austria, who believes that the Eurotower should proceed with another rate hike of 75 basis points, in the December meeting.
Interviewed by the FT, Holzmann said that there are in fact no signs that core inflation is reducing in the Eurozone, adding that another big rate hike, in his view, “it would give a strong signal about our determination” to fight against inflation.
Not to mention the presidents of the Bundesbank and the central bank of the Netherlandsi.e. of Joachim Nagel and Klaas Knotwho are pushing for the ECB to launch an instrument that would have many repercussions on Italian-made debt and on BTPs, in particular, so far great beneficiaries of the ECB’s generosity.
Christine Lagarde’s ECB announced on October 27th a new maxi rate hike of +75 basis points, after the historic one, the first of that intensity since the birth of the euro, launched last 8 September. Interest rates on the main refinancing operations, the marginal lending facility and the deposit facility were raised respectively al 2,00%, al 2,25% and all’1,50%.
BlackRock also commented on the Bank of England that “admitted that some recession is needed to bring inflation down but that, like other central banks, it fails to recognize how much recession will be needed to bring inflation down to its target”.
Last November 3, The Bank of England announces the steepest rate hike since 1989. Last November 17, the UK Chancellor of the Exchequer then presented a £55 billion blood and tears maneuver, stating that the UK is already in a recession.
BlackRock didn’t spare an investment tip, when it announced that it was “tactically underweight advanced market equities, having further trimmed risk“.