Bloomberg – Many on Wall Street have been warning of a recession for more than a year. But there is no reason why a country like the United States would need to experience an economic downturn, according to BlackRock’s Rick Reader.
“I just think the recession is exaggerated as a current phenomenon without a massive systemic impact,” Reeder, the company’s chief investment officer for global fixed income, said on the What Goes Up podcast.
“When you have a consumer-oriented, service-oriented economy, it’s more stable than people realize.”
BlackRock manages approximately $2.7 trillion in fixed income assets for its clients.
Here are some highlights from the conversation, which have been condensed and edited for clarity.
Q: Do you think we are out of crisis mode when it comes to inflation?
A: There’s a lot of academic thinking out there that when you’re above 3% you anchor people’s inflationary expectations, and it’s hard to get out of there. When you get to 3%, you’re somewhere close enough to target, which isn’t a scary piece of information, and monetary policy doesn’t have to be too concerned about it. You will see that inflation continues to decrease. I am more sure that inflation will fall than the unemployment rate will rise. I don’t think the Fed needs to destroy the jobs model today. In fact, I think trying to cut inflation does more harm than good. I think there is less natural migration. And once you reach these levels, patience is a virtue. Just let the patience, just let the time and the captive interest rate do their thing. And I think you’ll find that you get closer to the goal over time.
Q: What do you think will be the hiking trail in the future for the Federal Reserve?
A: Commodity inflation, we are reaching the goal. But in services, we’re not going to get there this year. Can you come next year? I don’t know, but I think you can get close and definitely within spitting distance and definitely somewhere you feel comfortable with. Even with today’s better data, you should be holding on to the idea that the Fed will increase in July.
I think they are still trying to make another trip, maybe in November. But now it’s a mystery whether you’ll walk more. Frankly, these rates are restrictive. The actual rates are at these levels, these are bound levels — let them permeate through the system. You see its impact on the banking system. You see the impact on commercial real estate. Let it marinate and it will do its job.
Q: We’ve already seen a lot of 2023 recession calls get pushed back to 2024. But if we don’t have a recession, how do you reverse that?
A: One of the best things about investing today is that you can own assets with a primary return. I bought some commercial paper the other day at 6.5% – CP 1 year, 6.5%. It’s like, I just want to go home at 6.5% and just sit back.
But suppose you have a lot of carry-on cash, a lot of early return on quality assets: investment grade credit, maybe take a little longer on some things like agency mortgages, and then I’m going to own some of these stocks: we suppose it’s in the stock market , if companies can drop 10%, 12% return on equity, you can have a nice return on the portfolio, frankly, more stable than it has been in the past because you get a lot of steady income. – Quality assets in fixed income.
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