Blackrock warns of growing recession risk as Fed fights inflation
Fed could trigger recession if it raises interest rates too quickly
The Fed is ‘sensitive’ to stagflation: Billionaire investor
The Carlyle Group co-founder David Rubenstein argues The Fed is attempting to avoid stagflation and not raising interest rates ‘too much’ amid soaring inflation.
The Federal Reserve is in an increasingly difficult position as it looks to tame red-hot inflation without triggering a recession.
The growing uncertainty over whether the U.S. central bank will be able to cool consumer demand without crushing economic growth has prompted BlackRock, the world's largest asset manager, to downgrade U.S. stocks to "neutral" this week.
"The Fed's hawkish pivot has raised the risk that markets see rates staying in restrictive territory," the note said. "The year-to-date selloff partly reflects this, yet we see no clear catalyst for a rebound. If they hike interest rates too much, they risk triggering a recession. If they tighten not enough, the risk becomes runaway inflation. It's tough to see a perfect outcome."
Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, May 4, 2022. (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)
The analyst note comes amid growing fears on Wall Street that the Fed may drag the economy into a recession as it seeks to tame inflation, which climbed by 8.3% in April, near a 40-year high. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms forecasting a downturn in the next two years, along with former Fed Chairman Ben Bernanke.
Economic growth in the U.S. is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.
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"The Fed is attempting to thread the needle while wearing boxing gloves and a mouth guard, which reduces its degrees of freedom to act without causing damage to the real economy," said RSM chief economist Joe Brusuelas, who has questioned whether the central bank will be able to achieve a soft landing.
A shopper walks through the aisles of the Dollar Tree store in Alhambra, California on December 10, 2021. (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)
Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation.
Fed Chairman Jerome Powell has acknowledged there could be some "pain associated" with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured and has pledged to "keep pushing" until inflation falls closer to the 2% target.
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"It's going to be a challenging task, and it's been made more challenging in the last couple of months because of global events," Powell said last week during a Wall Street Journal live event, referring to the Ukraine war and COVID lockdowns in China.
But he added that "there are a number of plausible paths to having a soft or soft-ish landing. Our job isn't to handicap the odds, it's to try to achieve that."