BlackRock Warning Fed Rate Hikes May Trigger Recession

BlackRock Warning Fed Rate Hikes May Trigger Recession
A sign for BlackRock Inc. hangs above their building in New York on July 16, 2018. (Lucas Jackson/Reuters)
Naveen Athrappully

The U.S. Federal Reserve’s attempt to rein in inflation by raising interest rates might end up pushing the country into a recession, BlackRock, the world’s largest asset manager, recently warned in a note.

“The Fed's hawkish pivot has raised the risk that markets see rates staying in restrictive territory,” the note said, according to Fox Business. “The year-to-date selloff partly reflects this, yet we see no clear catalyst for a rebound. If they hike interest rates too much, they risk triggering a recession. If they tighten not enough, the risk becomes runaway inflation. It's tough to see a perfect outcome.”

BlackRock has downgraded U.S. stocks to neutral.

12-month inflation hit a four-decade high of 8.5 percent in March. A month later, it only decreased slightly to 8.3 percent in April. The Fed raised its benchmark interest rate by 50 basis points in early May for the first time in 20 years. It has signaled that more such rate hikes will be announced in future meetings.
According to Fed Chairman Jerome Powell, the central bank is committed to raising interest rates until inflation comes down. Restoring price stability is “an unconditional need,” Powell said in an interview with The Wall Street Journal on May 17.

“There could be some pain involved,” he said, while adding that the Fed’s decision to bring down inflation might also push up the unemployment rate.

Powell himself has pushed back at the idea of an impending recession. Mary Daly, president of the San Francisco Federal Reserve Bank, also believes that the central bank can raise interest rates to the point where they are no longer stimulating economic growth without triggering a recession.

However, former Federal Reserve vice-chair Alan Blinder believes a recession is “pretty likely” next year. “I don’t mean 89 percent probability, but maybe 50 to 60 percent probability,” Blinder said to CNBC, while adding that the recession is likely to be a mild one.

Major banks also expect the United States to go into recession either this year or the next. Wells Fargo is expecting a mild recession at the end of 2022 and early 2023. Morgan Stanley believes there is a 25 percent probability of a recession within the next 12 months.

Bank of America estimates recession risk for 2022 to be low but elevated for 2023, while Credit Suisse believes there is a high risk of recession in the United States during the second half of 2023.

Goldman Sachs calculates a 35 percent chance for a recession within the next two years.

A majority of American CEOs are also expecting a recession, according to a recent Conference Board measure of CEO sentiment report. Around 57 percent of respondents expect inflation to decrease over the “next few years.”

They also believe the economy will suffer a “mild recession” lasting for a “very short” period due to rising interest rates.