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BlackRock’s Rieder: three reasons Fed will let inflation run 'hotter’

BlackRock’s Rieder: three reasons Fed will let inflation run 'hotter’

The Federal Reserve’s lack of movement on interest rates was unsurprising but gave way a background feeling that it will allow inflation to grow faster than expected, Rick Rieder has said.

The Citywire + rated manager and chief investment officer for fundamental fixed income at BlackRock made the comments in the wake of November’s Federal Open Market Committee meeting.

The two-day meeting resulted in a – largely telegraphed – decision to hold rates at the current level, while leaving the door open with further policy action in December. However, Rieder said the focus should not be on rates but inflation.

‘We did not expect yesterday’s FOMC announcement to indicate a change in policy rates, coming nearly a week before a highly contested general election on November 8, but we did anticipate the Committee would continue to make its case for a rate hike, almost certainly to come next month.’

‘We also think there is a significant subtext to be found in the Fed’s recent policy stance, in that it implies that the central bank will allow inflation to run a bit hotter than it has historically - the so-called “high-pressure economy”.’

Rieder said there were three reason the Fed is likely to take this stance, which are:

1) Lack of satisfaction with pre-existing inflationary expectations;

2) Potential growth/output function that is organically lower, attributable to demographic headwinds and technological disinflation;

3) Greater set of policy tools that can be employed to bring down inflation, as opposed to those geared towards increasing it.

Rieder said the focus on inflation is likely to coincide with a much-needed switch from monetary to fiscal policy focus. This, he added, was due to the evident waning of impact of a rate rise on long-term growth conditions beyond market short-term market moves.

‘The utility of extraordinarily low interest rate levels has long since passed much effectiveness in stimulating real economic growth and for some time now has solely been influencing the financial economy as a price-supporting mechanism.

‘It is extraordinary to think that the Fed last cut its policy rate in December 2008, and in the 63 FOMC policy meetings since that time, it has only moved rates once, while the economic, employment, and financial market landscape has changed markedly throughout this time.’

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