The Federal Reserve is “not in any race to cut interest rates” even if it opens the door to lowering them in a move toward a “more neutral” stance on monetary policy, according to BlackRock’s Rick Rieder.
“I still think March is early,” Rieder, BlackRock’s chief investment officer of global fixed income and head of the firm’s global allocation investment team, said in a phone interview. “For the Fed to go in March, I think we need some data to show some more tangible slippage in the economy than we’re seeing currently.”
The U.S. economy has been surprisingly strong, with gross domestic product increasing at an estimated annual rate of 3.3% in the fourth quarter. Other recent economic data have also been “solid,” including retail sales and employment, according to Rieder.
While inflation has eased substantially from its 2022 peak, he said the Fed may want to see a few more months of data to gauge whether it is “bending down” more than today in the “cyclical components” of the economy. To his thinking, there’s “not a lot of downside” to the Fed being patient in cutting rates in “an economy that’s operating at a good level” and inflation appears above its 2% target.
“My sense is, you still can wait till May,” said Rieder. “My base case is they go 25 basis points every other meeting starting in May.”
Federal-funds futures pointed to a 39% chance on Tuesday that the Fed will decide to reduce its benchmark rate by 25 basis points in March — from its current target range of 5.25% to 5.5% — according to the CME FedWatch Tool. Fed-fund futures indicated that traders expect the Fed’s policy rate will likely be lowered even further by midyear, potentially to at least 4.75% to 5.0% in June.
Goldman Sachs Group economist David Mericle said in a research note dated Jan. 29 that he continues to expect the Fed will start reducing rates in March and that its number of cuts will total five in 2024.
“We expect a March cut mainly because progress on inflation is already sufficient,” he said. “If Fed officials see even modest downside risks to economic activity and the labor market or to inflation, that could also strengthen the case for cutting sooner rather than later.”
Read: Consumer confidence climbs to 2-year high as inflation slows and economy keeps growing
Powell is scheduled to host a press conference on the Fed’s monetary policy at 2:30 p.m. Eastern Time on Wednesday, a half hour after the central bank releases its rate decision.
Rieder said he’ll also be listening for any discussion around the Fed potentially slowing down its quantitative tightening in the second quarter. Under QT, the Fed has been shrinking its balance sheet by letting Treasury securities and agency mortgage-backed securities roll off its balance sheet each month.
See: Why analysts say the Fed risks clogging the financial plumbing without a policy change
In the bond market, yields have risen this year, with the rate on the 10-year Treasury note BX:TMUBMUSD10Y trading around 4.08% on Tuesday afternoon, according to FactSet data, at last check.
After a repricing of rates in the Treasury market, “I think the 10-year has found its home,” said Rieder, describing its current yield as “fair.”
The yield on the 10-year Treasury note ended Monday at 4.089%, up 22.9 basis points for the year based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data. But the yield is down from around 5% in October.
The iShares Core U.S. Aggregate Bond ETF AGG, which tracks an index of investment-grade bonds in the U.S., has fallen 0.8% so far this year, according to FactSet data, at last check. The BlackRock Flexible Income ETF BINC, which Rieder actively manages, is outperforming the passive fund with a gain so far this month of 0.2%, FactSet data show.
Rieder said the BlackRock Flexible Income ETF, which may invest globally across the fixed-income market, is yielding around 6.6%. That’s similar to yields found in the junk-bond market, but from a portfolio with an implied “mid-investment-grade rating,” he said.
“I think one of the hallmarks of 2024” will be rate volatility coming down, said Rieder.
Meanwhile, the U.S. stock market is up this year, after surging in 2023.
The S&P 500 index booked a fresh record high on Monday, bringing its gains in 2024 to more than 3%. The index SPX was trading slightly lower on Tuesday afternoon, as investors await the outcome of the Fed’s two-day policy meeting that concludes on Wednesday.
Read: The Fed may be ‘patient’ in cutting rates, says portfolio manager at Morgan Stanley
