The Federal Reserve will press on with interest-rate hikes despite the collapse of Silicon Valley Bank, according to the BlackRock Investment Institute.
(Bloomberg) — The Federal Reserve will press on with interest-rate hikes despite the collapse of Silicon Valley Bank, according to the BlackRock Investment Institute.
Although stress in the banking sector is denting investor confidence and tightening financial conditions, the US central bank will need to continue to raise rates to combat rampant inflation, says the research arm of BlackRock Inc., the world’s biggest asset manager.
“We don’t see these developments allowing the Fed to halt its rate hike campaign-this is a very different environment from 2008 when all monetary policy levers were used to support the economy,” BII strategists wrote Monday. “Instead, by shoring up the banking system, the Fed can focus monetary policy on bringing inflation down to its 2% target.”
The view stands in stark contrast to market expectations for the path of monetary policy going forward. Swaps traders are now pricing in less than 25 basis points of additional tightening this cycle, after fully pricing in a half-point hike in March less than one week ago. Traders are also expecting approximately three quarter-point rate cuts this year following a May peak.
Goldman Sachs Group Inc. and Barclays Plc recently said the Fed will pause its monetary tightening cycle at next week’s meeting, while Nomura on Monday said the central bank will cut rates by a quarter percentage-point and stop reducing the size of its balance sheet at the gathering.
According to BlackRock, the collapse of Silicon Valley Bank is an example of “financial cracks” stemming from the fastest rate-hiking campaign since the 1980s. Knock-on effects for the economy will include tighter financial conditions and credit supply, particularly in the technology sector.
But the situation is different than the global financial crisis in 2008, BlackRock said. The assets at the center of the current bank troubles — US Treasuries — are among the most liquid and transparent, which will increase the effectiveness of the US government’s measures to prevent wider contagion.
BII said investors should favor short-term government bonds for income, on the basis that the recent tumble in yields could reverse as the Fed presses on with rate hikes. The firm also said that most equities aren’t fully pricing in the economic damage of the Fed’s hikes, and it is sticking with its underweight stance on developed market stocks.
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