The Fed should go on vacation after this year's rate hikes to avoid the risk of overdoing its tightening efforts, BlackRock says

• The Fed is right to move quickly in raising rates but should pause after this year, BlackRock said Friday.
• The Fed risks overdoing its tightening and unraveling economic progress since the pandemic.

BlackRock, the world's largest asset manager, said the Federal Reserve's rate hikes in 2022 to combat inflation should be enough to put policy makers in a wait-and-see position that's needed to reduce the risk of them overtightening and damaging the world's largest economy.

That view was laid out in a Friday note by Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages $2.4 trillion in fixe- income assets.

"[Fed Chair Jerome Powell's comments] did little to dissuade our belief that that the Federal Open Market Committee can raise policy rates another 75 basis points at the September 21 meeting," Rieder said after Powell's speech at the Fed's Jackson Hole symposium. Markets were pricing in about 125 basis points of rate hikes by the end of 2022, the investment executive said.

Another big hike would bring the Fed Funds rate to a range of 3%-3.25%, which is beyond the long-term estimates of the "neutral rate" held by members of the rate-setting committee, Rieder said. A neutral level of interest rates neither feeds nor starves economic activity.

Pushing the Fed Funds rate to a mid- to high- 3% range "will allow the Fed to get to its destination and then to relax and watch its policy adjustments work," BlackRock said.

The Fed is still a long way from its 2% inflation target. One measure, the headline consumer price inflation rate, burned at 8.5% in July, although it eased from 9.1% in June, a 41-year peak.

While "it's absolutely imperative that the Fed get the currently high rate of inflation under control, we are concerned about the potential for the central bank to overdo the tightening and undo much of the progress that has been made in recovering from the pandemic shock," said Rieder.

He pointed to wage growth since the COVID outbreak, particularly for lower-income workers. The higher pay and a tight labor market should be positive for lower-income earners if the country is past the worst in price increases for food and energy.

"Today we find ourselves in an environment in which corporate investment is slowing and the housing market is cooling; engineered by higher prices, tighter policy and economic uncertainty, so the Fed by the end of the year will set up to merely sit back, relax like a vacationer today, and merely watch how the long and variable lags work through the system," said BlackRock.

The journey to slow down growth to reduce inflation will bring "some pain" to American households and businesses, Powell said on Friday, emphasizing that price stability is key to maintaining the strong US labor market. The Fed's four rate hikes in 2022 are, among other things, pushing up mortgage rates and making credit card debt more expensive.

Stocks sold off after Powell's speech. The S&P 500 and the Dow Jones Industrial Average fell more than 3%, while the Nasdaq Composite plunged nearly 4%.

The Fed Funds rate currently stands at a range of 2.25%-2.75%, in part after rate increases of three-quarters of a percentage point in June and July. The central bank's preferred inflation gauge, the core PCE, on Friday came in at 4.6% for July year over year, and was up 0.1% month over month, softer than Econoday's consensus estimates of 4.7% and 0.3%, respectively.

After Powell's speech, the CME FedWatch tool showed a 45.5% probability of a rate increase of 50 basis points next month, higher than the 36% probability on Thursday. Meanwhile, the probability of a rate increase of 75 basis points was at 54.5%, down from 64% a day prior.

The Federal Open Market Committee's next meeting will kick off on September 20.