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In One Chart: Fed looks ‘dead set’ on tightening financial conditions until the economy slows, warns BlackRock

The Federal Reserve’s battle to get inflation down from a 40-year high likely means it will raise interest rates until the U.S. economy slows, strategists at the BlackRock Investment Institute warned on Monday.

“The Fed seems dead set on raising rates this year to levels that, in our view, would clearly slow the economy,” Jean Boivin, head of the BlackRock Institute, and his team of strategists wrote, in a Monday note.

Chairman Jerome Powell last week raised the central bank’s policy rate by 75 basis points — its biggest rate hike in almost three decades — while signaling a willingness to raise its benchmark rate to nearly 4% next year, even as the Fed has revised its economic growth forecasts lower (see chart) in recent months.

Higher rates, lower growth

BlackRock Investment Institute

The central bank “seems to be responding to the ‘politics’ of current high inflation,” with its focus on “overheating demand,” rather than the “unusually low production capacity” due to an “incomplete” pandemic restart, Boivin’s team wrote.

BlackRock Inc.
BLK,
+4.62%
,
the world’s largest asset manager, already twice this year reduced portfolio risk, given “growing concerns over the effect of the energy
CL00,
+1.01%

crunch on growth and central banks overtightening,” Boivin said.

“This is why we don’t see the risk asset retreat as a reason to buy the dip — and expect more volatility ahead.”

Related: Recession. Millions of layoffs. Mass unemployment — Larry Summers’ forecast stirs up hornet’s nest

Equity strategists at Morgan Stanley
MS,
+1.82%

and Goldman Sachs
GS,
+1.44%

were among a chorus of major investment banks to warn on Tuesday that the U.S. stock market wasn’t fully pricing in a recession.

RBC Capital Markets
RY,
+2.25%

also noted the S&P 500
SPX,
+2.37%

tends to lose one-third of its value, on average, around a recession, which could still pull the index down to about 3,500, from roughly its 3,770 level Tuesday.

Stocks pushed higher Tuesday to kick off summer, but the Dow Jones Industrial Average
DJIA,
+1.95%

still was off 16% on the year so far, the S&P 500 down about 21% and the Nasdaq Composite Index
COMP,
+2.62%

off 29% to start 2022.

Much of the $53 trillion U.S. fixed income markets also has been having a historically bad year, with total returns deeply in negative territory.

Read: Why stock-market investors are ‘nervous’ that an earnings recession may be looming

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