BlackRock: Fed interest rate cuts will not be as deep as market expects

NEW YORK (Reuters) – The U.S. Federal Reserve is unlikely to cut interest rates in the United States as much as the bond market expects, given the robust economy and persistently sluggish inflation, the BlackRock Investment Institute said in a statement on Monday.

The US Federal Reserve is expected to cut interest rates for the first time in over four years on Wednesday. Speculation about the extent of the first interest rate cut has caused volatility in the financial markets ahead of the decision.

Interest rate futures traders expect interest rates to be cut by about 120 basis points this year and by a total of 250 basis points by the end of 2025. This would push interest rates up from the current 5.25 to 5.5 percent to about 2.8 to 2.9 percent by the end of next year.

A rate cut of this magnitude reflects exaggerated fears of recession, as well as expectations of a sustained decline in inflation, which will, however, likely only cool temporarily, said the institute, a branch of the world's largest asset manager BlackRock.

“As the Fed prepares to begin cutting interest rates, markets are pricing in cuts as deep as those seen in past recessions. We believe such expectations are exaggerated,” the report said.

Despite the recent rise in unemployment, employment continues to grow and supply bottlenecks continue to put upward pressure on prices, it said.

“An ageing workforce, persistent fiscal deficits and the impact of structural changes such as geopolitical fragmentation are likely to keep inflation and policy interest rates high over the medium term,” the report said.

The institute is underweight or pessimistic about the outlook for short-term US government bonds, as current yields reflect expectations of significant interest rate cuts.

Instead, the firm is maintaining its overweight stance on U.S. equities due to optimism about the impact of artificial intelligence.

(Reporting by Davide Barbuscia; editing by Andrea Ricci)