BlackRock Doubts Fed Will Cut Rates as Deeply as Markets Expect

BlackRock Investment Institute is skeptical about the Federal Reserve implementing as many rate cuts as the bond market anticipates.

The firm argues that the current strength of the US economy and persistent inflation make significant reductions unlikely.

Market traders are predicting a total of 120 basis points in rate cuts this year, with further reductions possibly reaching 250 basis points by the end of 2025. This would lower the current rate range of 5.25%–5.5% to approximately 2.8%–2.9% by late next year. However, BlackRock believes these expectations are overly optimistic and that the Fed is unlikely to replicate past recession-level cuts.

Factors such as an aging workforce, ongoing budget deficits, and geopolitical tensions are expected to keep inflation and interest rates elevated in the near term. Consequently, BlackRock is cautious about short-term US Treasuries, anticipating that if rate cuts are less substantial than expected, bond performance might suffer.

Conversely, BlackRock remains positive about stocks, particularly those linked to artificial intelligence (AI), and is overweight in US equities due to their long-term growth potential.

In the crypto market, lower interest rates generally benefit assets like Bitcoin. Despite this, Bitcoin is down about 3% to $58,158, and Ether has fallen roughly 4% to $2,302. Historically, rate cuts have supported crypto, but current market conditions differ from previous bullish periods.

Analysts are divided on the impact of potential rate cuts. Some see opportunities in stablecoin lending yields exceeding 5%, which could draw institutional interest into decentralized finance. However, others caution that motivations behind rate cuts and external factors, such as political events, could affect the market.