BlackRock Expects Fed Chair Jerome Powell to Pause Hikes
According to Laura Cooper, BlackRock’s Senior Macro Investment Strategy for iShares EMEA, the Federal Reserve (Fed) chair Jerome Powell is expected to pause interest rate hikes at the next Open Markets Committee Meeting. This announcement will leave the door open for future hikes while emphasizing the importance of economic data in future decisions. Cooper predicts that rates will remain in “restrictive” territory until mid-2024 before the central bank adjusts rates towards a more neutral level.
“Despite signs of disinflation becoming firmly entrenched, price pressures are likely to settle above the [Fed’s] 2% target.”
Fed Unlikely to Cut Rates Unless Economy Deteriorates
Marilyn Watson, BlackRock’s head of Global Fundamental Income Strategy, agrees that the Fed is unlikely to change rates this year. For any rate cuts to occur, the central bank would need to witness an economic deterioration, lower gross domestic product, and a decrease in unemployment. Watson expects interest rates to remain relatively stable throughout this year and suggests that any adjustments may come next year.
Since March 2022, the Federal Reserve has raised interest rates 11 times to combat rising US inflation. The Open Markets Committee is currently in a two-day meeting to determine whether they will continue raising rates or pause. The Fed is anticipated to release a “dot plot” graphic displaying officials’ rate predictions.
Junk Bond Issuance Surges Amid High Interest Rates
Amanda Lynam from BlackRock states that the persistence of high interest rates is likely to lead companies to issue more junk bonds for fundraising purposes. In September, leveraged loans and junk bond issuances reached $40 billion. Lynam suggests that corporations are not anticipating a reduction in interest rates, making this an opportune time for debt financing.
“I think corporates are coming around to the idea that debt financing costs might not be any better, really, later this year or into early 2024.”
Companies issuing bonds must pay interest to investors and eventually repay the principal at maturity. So far, the default rate has remained low.
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