BlackRock Argues Federal Reserve Is Not Maintaining Balance Between Cutting Inflation, Avoiding Downturn

BlackRock Argues Federal Reserve Is Not Maintaining Balance Between Cutting Inflation, Avoiding Downturn

Asset management company BlackRock contends that the Federal Reserve is not effectively maintaining a balance between reducing inflation and avoiding a downturn amid widespread pressure to control higher prices.

Year-over-year inflation reached 8.5% in July 2022, according to data from the Bureau of Labor Statistics, with a slight moderation from the 9.1% reading in June 2022 driven by lower energy prices — even as costs for food, new vehicles, medical care, and shelter continue to rise. Federal Reserve Chair Jerome Powell said during a hawkish speech at the central bank’s recent symposium in Jackson Hole, Wyoming, that policymakers are willing to “bring some pain” in their efforts to combat inflation.

BlackRock analysts, therefore, said in a market commentary that the central bank’s policies have been too aggressive. “We think they’re not prioritizing economic implications over pressure to curb inflation,” they remarked. “It seems they do not intend, for now, to manage the sharp trade-off between inflation and growth. That’s a big deal. We think getting inflation back to central bank targets means crushing demand with a recession. That’s bad news for risk assets in the near term.”

To stimulate the economy after COVID and the lockdown-induced recession, the Federal Reserve pegged a near-zero target interest rate and began buying $120 billion in assets each month — policies intended to lower the cost of borrowing while increasing the amount of liquidity in the economy. With the rollback of loose monetary policy, however, the cost of borrowing increases, introducing constraints upon business activity and consumer spending.

BlackRock CEO Larry Fink noted during an interview with Fox Business that “very large” fiscal stimulus packages in the United States and Europe render central bankers’ work to manage inflation “much harder.”

“We have a disconnect between what policy is being proposed and what the responsibilities of these central banks are,” Fink commented. “We’ve created policies that are very inflationary.”

President Joe Biden recently signed the Inflation Reduction Act — a $740 billion package that includes $369 billion in climate spending. Though administration officials have claimed that the bill decreases the federal deficit, Fink said that “whatever deficit reduction” produced by the law has been offset by other policy proposals.

Fink also acknowledged that the United States is “technically” in a recession given “raw” economic statistics, although economists in the White House have rejected such claims. The United States met the rule-of-thumb definition of a recession — two consecutive quarters of negative growth — last month as the economy shrank at a 1.5% annualized rate in the first quarter and contracted at a 0.6% pace in the second quarter.

BlackRock has played a pivotal role in encouraging a shift to renewable energy through its embrace of the environmental, social, and governance (ESG) movement. As California faces rolling blackouts and the European Union responds to soaring electricity prices, Fink appeared to acknowledge that a “long-term transition” to green power sources is necessary.

“We do believe investing in infrastructure is going to be a good alternative,” he commented. “Investing in water, investing in gas, investing in hydrogen — these are all going to be great long-term investments for retirees.”