BlackRock’s fixed-income CIO says rate cuts, not hikes, key to taming inflation

investmentnews.com:

BlackRock Inc.’s Rick Rieder has some advice that bucks conventional wisdom: The best way for the Federal Reserve to temper inflation will be to lower rates, not hold them higher.

That’s because well-heeled Americans are earning more than they have in years from fixed-income investments, given that benchmark rates remain on hold at their highest level in a generation, according to Rieder, BlackRock’s chief investment officer of global fixed income.

“I’m not certain that raising interest rates actually brings down inflation,” Rieder told Bloomberg’s David Westin for an upcoming episode of Wall Street Week airing Friday. “In fact, I would lay out an argument that actually if you cut interest rates, you bring down inflation.”

Middle- to higher-income Americans “are getting a big benefit from these interest rates,” he said. “We’re moving to a service-oriented economy, more money is being spent on services, but actually what’s happening — because goods prices have come down so much — it’s allowing for disposable income to go into services.”

Rieder pointed to sticky inflation across service sectors, like auto and health insurance, as evidence. “They’re unresponsive to interest rates and people are spending — older people, middle- to high-income are spending — and are keeping that service-level inflation at high levels.”

“The price of a pair of tennis shoes is what it was 20 years ago. If you go to a tennis match, it’s double what it used to be,” he added. 

Still, not all market watchers are ready to overturn a fundamental tenet of monetary policy — that higher borrowing costs ultimately stifle economic activity and, consequently, inflation.

“A lot of the inflation that’s going away now, I think I would agree, isn’t being