- The risk that the Fed's rate hikes will trigger a recession led BlackRock to downgrade US stocks on Monday.
- "It's tough to see a perfect outcome," BlackRock said.
- The Fed plans to raise the Fed Funds Rate by 50 basis points at each of its upcoming meetings.
The Federal Reserve is stuck between a rock and a hard place as it attempts to balance raising interest rates with 40-year highs in inflation and the potential for an economic recession.
The difficult position the Fed finds itself in spurred BlackRock, the world's largest asset manager with nearly $10 trillion under management, to downgrade US stocks to "neutral" on Monday.
"The Fed's hawkish pivot has raised the risk that markets see rates staying in restrictive territory. The year-to-date selloff partly reflects this, yet we see no clear catalyst for a rebound," BlackRock said. "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."
And recent hawkish comments from Fed Chairman Jerome Powell last week signal that the Fed will do whatever it takes to stop the continued rise in inflation, as he still sees a strong labor market and resilient consumer as surviving a spate of rate hikes.
The Fed is expected to raise the Fed Funds Rate by 50 basis points at both of its two upcoming meetings this summer. The Fed first raised interest rates by 50 basis points earlier this month, representing the first time it raised rates by that much since 2000.
That quick pace of rate hikes by the Fed, combined with plans to reduce its balance sheet starting next month, means that it will be harder for central banks to come to the rescue and halt a growth slowdown in the economy by cutting interest rates and buying assets like it's done in prior periods of economic slowdowns, BlackRock said.
The poor setup for equities with the Fed's monetary tightening plans is also compounded by high commodity prices due to the ongoing Russia-Ukraine conflict and the recent COVID-induced slowdown in China.
"We expect China's deteriorating economic outlook to be a drag on global growth – and we think consensus forecasts for China's 2022 GDP growth are likely to get revised down," BlackRock said.
Ultimately, the one catalyst that would reverse BlackRock's view on equities and cause it to lean back into an overweight view on US stocks is if the Fed makes a dovish pivot, only possible if inflation quickly cools down.
And according to Fundstrat's Tom Lee, that could happen given that a recent uptick in layoffs and a slowdown in new job postings could help tame wage inflation, which is a core driver of overall inflation readings.