The Fed is showing it's willing to overtighten after being too lax - and it makes no sense with the economy operating in a good place, BlackRock's investment chief says

• The Fed is showing it's willing to overtighten the economy, and it makes no sense, BlackRock's Rick Rieder said.
• He pointed to historic drops in housing activity as well as steady declines in the labor market.

The Fed is showing markets that it's willing to overtighten the economy after being too lax with inflation last year – but it makes no sense with the economy still functioning well, according to BlackRock's investment chief Rick Rieder.

"The Fed was too easy for too long. And now we've got the most historic set of rate rises while draining liquidity," Rieder said in an interview with Bloomberg on Friday, two days after the central bank delivered another 75 basis point rate hike.

It's the fourth rate hike of that size the Fed has delivered this year in response to rising inflation, which barely cooled to 8.2% in September's Consumer Price Index report. But real inflation in the economy often lags behind official statistics, experts say, raising concern that the Fed's efforts to catch up to rising prices could easily squeeze the economy into a recession.

Those fears grew after the Fed's recent policy decision. In his speech on Wednesday, Powell cited the labor market and rent prices as some of the reasons why he didn't see "a case for real softening just yet," sparking a sell-off in stocks into the end of the day's session.

But it makes "no sense" for the Fed overtighten the economy after being too lax last year, Rieder argued, especially when economic data is cooling at "historic" levels. He pointed to falls in housing activity, auto activity, as well as in the labor market, which showed an unexpected rise in job openings and new payrolls, but were overall on the downtrend.

"Listen, the numbers are slowing from the three month-moving average for jobs, versus six-month versus 12-month. We are moving in the right direction. We are slowing," he said, warning that the Fed needed to be cautious about hiking rates too high.

"I don't think we've got to keep veering the boat from one side to the other side. They've moved a lot. I think quite frankly the moves they've made have been brilliant this year. Going to further overtighten, I don't know. That one I thought was a bit excessive," Reider added.

Other analysts have also urged the central bank to pivot from aggressive hiking, with Fundstrat's Tom Lee stating the Fed needed to "stop flinching" at rising stock prices, and headline inflation could start to show more signs of cooling in next week's October's CPI report. Investors are expecting a slightly softer 50 basis point rate hike to come in December, though some market commentators have warned the Fed take rates as high 5% in its mission to crush inflation.