BlackRock’s Rieder Says Fed Could Be Forced to Adjust Policy

Tame inflation data for February, reflecting an environment of stable price pressures, is likely to give way to elevated readings on the back of strong economic growth. A ramp-up in U.S. activity is one of the factors that may eventually push the Federal Reserve to adjust its low-rate policy.

That’s the view of BlackRock Inc.’s Rick Rieder. “We’re witnessing the end of a period of disinflation in many places, and the re-rating of growth and prices to impressively higher levels,” the chief investment officer of global fixed income wrote in a note after Wednesday’s release of consumer-price data. “Without another severe Covid-driven double dip, it is hard to bet that the roughly 60% chance of one Fed policy rate hike by 2023 implied by market pricing is too high.”

Speculation is building ahead of the Federal Open Market Committee’s March 16-17 meeting that policy makers will at some point need to deliver multiple rate hikes. That view is colliding with comments from some Fed officials recently that reinforced the central bank’s dovish policy stance -- making next week’s meeting one of the more eventful gatherings of the year.

The rates market has been readjusting partly on the perception that higher realized and expected inflation rates “might eventually force the Fed’s hand policy wise,” Rieder said. “We’re not suggesting that there will be a hike, could be a hike, or should be a hike, but rather that some outcomes in the distribution are being mispriced by the market, in our estimation.”

At some point, financial stability risks from an extremely low policy rate, coupled with an expected booming economy may pressure the Fed to adjust policy, Rieder said. Policy adjustments are likely to be gradual and “in response to spectacular growth, such that dips in risk asset prices (in response to nothing more than policy normalization) should be viewed as potential buying opportunities.”

Already, certain corners of the market are turning their attention to a post-2021 rates environment. In swaptions, a popular and relatively inexpensive trade has emerged targeting the Fed to hike seven to eight times by March 2025, based on a Barclays Plc analysis of reported swaps data.

According to Michael Pearce of Capital Economics, Fed policy makers are likely to use next week’s statement and updated economic projections “to push back on market expectations that rate hikes are rapidly coming into view.” Officials are also expected to leave policy unchanged while not sounding the alarm about rising bond yields, he said in a note Wednesday.

©2021 Bloomberg L.P.

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