Rick Rieder of BlackRock Inc. gave some advice that goes against conventional wisdom: the best way for the Federal Reserve to curb inflation is to lower rates, not keep them high.
That’s because wealthy Americans are earning more than they have in years from fixed-income investments, with benchmark rates remaining at their highest levels in a generation, according to Rieder, BlackRock’s chief investment officer for global fixed income. .
“I’m not sure that raising interest rates actually reduces inflation,” Reeder told Bloomberg’s David Westin on an upcoming episode of the program. Wall Street Week will air on Friday. “In fact, I would make the argument that actually if you lower interest rates, you will lower inflation.”
Middle- and high-income Americans “are benefiting more from these interest rates,” he said. “We’re moving towards a service-oriented economy, more money is being spent on services, but actually what’s happening—because commodity prices have fallen so much—is allowing disposable income to go toward services.”
As evidence, Reeder pointed to persistent inflation in service sectors such as auto insurance and health insurance. “They don’t respond to interest rates and people spending—older people, middle- and high-income people spending—and they keep service level inflation high.”
“The price of a pair of tennis shoes is the same as it was 20 years ago. If you go to a tennis match, it’s double what it used to be,” he added.
However, not all market watchers are willing to abandon the fundamental principle of monetary policy – that higher borrowing costs ultimately stifle economic activity and therefore inflation.
“I think I would agree that most of the inflation that is going away now is not caused by monetary policy easing, at least not from the peak,” said Seth Carpenter, chief global economist at Morgan Stanley. said Bloomberg observation on Friday. “But personally, I’m skeptical that everything—the empirical literature about how monetary policy works—is completely wrong. I would disagree with the basic principles.”
Bond markets rallied On Wednesday, after a report showed overall consumer price growth slowed in April, swap traders increased bets that the Fed will cut them by as much as two-quarters of a point in December. But inflation data also showed that price increases are slowing in some parts of the service economy—from housing costs to auto insurance and health care. proving more difficult to tame.
However, “the worst fears have been put to rest” with the release of April consumer price index data, BlackRock’s Rieder said. “As long as you have stable prices, hire a lot of people, increase your workforce and slow down your growth a little bit, that’s pretty good.”