BlackRock on the Fed, Bank of England and European Central Bank – think back on the horizon

This comes from Blackrock (BlackRock is the largest asset manager in the world, with approximately $9.5 trillion in assets under management) on the Federal Reserve, BoE and ECB:

We are in a new world shaped by supply. Significant shifts in spending and production constraints are at the root of inflation. The constraints are rooted in the pandemic and have been exacerbated by the war in Ukraine and lockdowns in China.

  • The Fed raised rates another 0.75% in July and confirmed its forecast for further rate hikes in an effort to contain inflation. The Fed is still looking through the lens of typical late-cycle overheating as opposed to a restart, in our view. We believe reality will eventually strike and a stalled restart will cause the Fed to change course.
  • The Bank of England raised rates to 1.75% in August. It also recognized the growth-inflation trade-off – unlike other major central banks. It is now experiencing a prolonged recession until 2023, partly due to the energy shock. The ECB surprised with a larger than expected rate hike of 0.5% in July. It also announced a new bond purchase facility to limit the risks of rising rates leading to a fragmentation of the euro zone.
  • The ECB and the markets are underestimating the risk that the energy crisis will cause a recession, we believe. The ECB will eventually accept this and rethink its rate trajectory.

Investment implication: We are tactically underweight most emerging market stocks after further reducing risk.


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