- There's likely to be further pain ahead for US stocks, a BlackRock iShares strategist told Insider.
- Karim Chedid expects the Federal Reserve to hold interest rates above 5% for the whole of 2023.
The Federal Reserve's efforts to crush inflation have upended the traditional investing playbook, and anyone that hasn't realized that will see their portfolio struggle, according to a BlackRock iShares strategist.
Karim Chedid told Insider he believes markets can no longer rely on a Fed "put" — where the central bank eases up on monetary tightening to support slumping stocks.
"In the past, we could rely on the central bank put when macro fundamentals deteriorate," Chedid said. "Today, we're in a very different environment."
Chedid, the head of iShares investment strategy for EMEA, discussed how the market has started to react to a "Goldilocks" economic environment, defined by growth and inflation that aren't running too hot or too cold.
He said the current economic consensus suggests 2023 will bring "lukewarm" growth and inflation, forcing the Fed to adjust accordingly, throwing off investing approaches that have worked in recent years.
"Goldilocks doesn't save the day in our new playbook," Chedid said. "Central banks are focussed on one thing, which is restoring price stability."
Stocks have rallied at the start of 2023, with the benchmark S&P 500 climbing 4.4% and the tech-heavy Nasdaq Composite up 6.1% year-to-date.
Some investors think that the Fed will ease up on its interest-rate hiking campaign to support stocks and the economy at some point in 2023, with inflation now having fallen for six consecutive months.
The majority of traders expect the central bank to start slashing interest rates by the end of the year, according to CME Group's FedWatch Tool – but they could be set for a rude awakening, according to BlackRock's Chedid.
He expects the Fed to gradually raise rates by another 75 basis points from their current level of around 4.5%, and then hold them above 5% for the whole of 2023. That aligns with what policymakers have said.
Chair Jerome Powell has repeatedly signaled that the Fed's main focus is on taming inflation. Two key regional Fed chiefs — San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic — said last week they expect policymakers to raise rates above 5% and hold them there to bring soaring prices under control.
"There will be risk wobbles because markets will have to deal with a reckoning — that central banks will not ease as quickly as they'd expected," Chedid said. "We expect hikes and then holds, as opposed to hikes and then cuts, for central banks."
That reflects a new environment where the Fed's only priority is taming inflation, according to Chedid. The Consumer Price Index inflation gauge rose 6.5% last month, meaning prices are still rising at a rate way above the central bank's 2% target level.
The BlackRock strategist said he wouldn't expect the Fed to even consider slashing interest rates until wages — which are still rising across the US, according to the December jobs report — have started to cool down.
"We haven't seen wages falling to the extent that would suggest being on track to hit the Fed's inflation target and so the Fed will continue overtightening, which means getting above 5%, probably to 5.25%," Chedid said. "And then importantly, staying there."
"They need more evidence to prove that they have truly brought inflation under control — until they get there, they will hold rather than cut," he added.