BlackRock: Reaction to Fed
By Jean Boivin, Head of the BlackRock Investment Institute
The S&P 500 and U.S Treasuries responded positively after the Federal Reserve kept rates on hold but left the door open to more policy rate cuts. Unusually high policy uncertainty has rattled financial markets this year. The Fed can do little to resolve that – and is itself subject to it. Fed Chair Jerome Powell underscored this several times, pointing to uncertainty as a reason for 'inertia': The policy path implied by the committee’s 'dot plot' was unchanged, even though it also showed expectations of lower growth and higher inflation.
The base case that Chair Powell communicated for tariffs is that of a one-off impact on inflation. He also characterized the labor market as 'balanced', while we still see tightness that is keeping wage pressure elevated. The potential impact of the new administration’s fiscal policy was absent from Chair Powell’s comments.
Given the recent lack of progress on inflation, the Fed’s assessment of a balanced labor market and tariffs having a one-off inflation impact has left it open to an upside surprise on inflation, in our view. We think the Fed will find it difficult to cut more than once or twice this year – even if prolonged uncertainty starts to hurt otherwise healthy growth.
That’s why we would lean against today’s move in U.S Treasuries and pricing in of more Fed cuts. We think the fiscal outlook means the path for long-term bond yields in the U.S and beyond is upwards from here. We stay overweight U.S. equities on our tactical horizon of six to 12 months as policy uncertainty should ease over that period. Economic conditions don’t currently point to a recession and corporate earnings remain resilient.