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BlackRock issued a pessimistic view of the impact the Federal Reserve’s hawkish policy will have on the economy, suggesting that the central bank’s aggressive campaign to increase interest rates may have already made a recession inevitable.
“We see central banks on a path to overtighten policy,” the world’s largest asset manager stated in a research note on Tuesday. “We think rates will – and may already have – hit levels that make recessions foretold.”
The comments came as Wall Street experienced a wave of buying on Tuesday morning, sending the S&P 500 (SP500), Dow (DJI), and Nasdaq (COMP.IND) higher amid hopes that the Fed will soon signal that it will slow the pace of its interest rate increases.
Despite the tick higher in stock prices, BlackRock argued that investors have yet to price in the full implications of Fed policy, saying the likelihood of a recession “isn’t yet reflected in earnings and market pricing, in our view.”
“Central banks haven’t fully acknowledged that hiking rates enough to tame inflation will cause recessions,” the firm added.
The Fed is scheduled to announce its next rate decision on Wednesday, with the central bank widely expected to announce its fourth consecutive increase of 75 basis points. From there, Wall Street will be keyed into the Fed’s projections for future policy, as opinions vary widely about where the central bank will land in early 2023.
Looking ahead to the Fed’s March meeting, probabilities vary widely about where interest rates will sit by that time. See a chart of the current implied odds for the March meeting, based on current trading:
In broader market news, not only are stock index futures pointing to a higher open Tuesday, so are the benchmark tracking ETFs (NYSEARCA:SPY), (VOO), (IVV), (DIA), and (QQQ), as the Fed starts its two-day meeting.
