BlackRock's global fixed income chief says the European Central Bank just turned up the pressure on the Federal Reserve, making it slightly more possible the Fed could cut rates Wednesday instead of waiting to do so in July as expected.
Rick Rieder, who is also head portfolio manager for BlackRock's Global Allocation Fund, does not expect a Fed rate cut until July, but he said the European Central Bank head's dovish comments signal the ECB is going to ease its policy even more.
"I do think there is a chance they go, but the odds are not high," Rieder said of a possible Fed move Wednesday.
ECB President Mario Draghi said Tuesday that Europe's central bank could cut interest rates again or conduct more asset purchases if inflation doesn't meet its target. That sent global bond yields tumbling, with the German 10-year bund yield falling to an all-time low of negative 0.32% and the French 10-year to its first negative yield ever.
"I think Draghi raised the bar. I think Draghi, his comments here are very aggressive. When he says inflation has to be above that level at some time in the future, that doesn't hit the bar, that says he wants to go beyond it. That raises the bar," said Rieder. The ECB has been aiming to keep inflation close to 2%, well above the May level of about 1.2% for the euro zone.
Rieder, whose firm manages $6.5 trillion in investments and is the world's largest asset manager, said Draghi is also putting his mark on policy that could remain in place after he steps aside in October. "I do think of this as his legacy statement. He is setting a framework out there so whoever the incoming president is going to consider this very highly and not reverse course. He's putting a stake in the ground."
As the European yields fell to record lows Tuesday, the U.S. 10-year yield reached 2.01%, its lowest level since 2016. The yield, which moves opposite price, rose to 2.05% later in the day. "I do think we're going to get below a 2% 10-year," Rieder said. "It has to do with trade. I do think the U.S. economy is in good shape, and I think ultimately rates can trend higher. I think you can get another 30, 40 basis points higher in yield The next steps are going to be a bit lower."
Rieder said if the trade situation between the U.S. and China deteriorated, the 10-year yield could fall to 1.8 or 1.85%.
Draghi's comments drew a response several hours later from President Donald Trump, who criticized the ECB president for moving toward more monetary stimulus in Europe, which could weaken the euro relative to the dollar. Trump has complained that foreign governments intentionally weaken their currencies, making it hard for the stronger dollar to compete in global trade.
"They have been getting away with this for years, along with China and others," Trump said in a tweet, noting a weaker euro would make it "unfairly easier for them to compete against the USA." Draghi later said, in response to Trump's comment, that the ECB does not target its exchange rate.
Draghi's comments came on the first day of the Fed's two day June meeting. At the end of the meeting Wednesday afternoon, the Fed is expected to release a revised statement and lowered economic and interest rate forecasts that will clear the way for it to cut interest rates, possibly as early as the July meeting.
Rieder said the Fed finds itself in a position where it will want to signal a strong policy move. "I think the context is important. Draghi lifted the bar, and whether its the RBI [Royal Bank of India} or Mexico, we're in a rate cutting cycle globally," he said.
"If the Fed didn't open the door widely to a significant cutting of rates, the dollar would appreciate and that's not where they want to go," he said. For that reason, he added, he expects the Fed could move in July, with a 50 basis point, or a half percentage point rate cut, double what some forecasters expect.
Rieder said Fed Chairman Jerome Powell can take a pass at the June meeting. "I think he's going to want more information on what the trade dynamics are going to be. I think it's a big deal. We're in a global rate cutting cycle," said Rieder.
Trump has been critical of the Fed and specifically, Powell for rate hikes last year, and has been calling for a rate cut for several months. In response to a question Tuesday about whether he would fire Powell, Trump said: "Let's see what he does."
The U.S. 10-year yield was at the lowest since November 2016, after Draghi's comments. But it later moved higher on Trump's comment that he will meet with China President Xi Jinping for an extended meeting at the G-20 later in the month. Besides central bank action, worries that trade wars are exacerbating a global slowdown have been pressuring yields.
The Fed has also been dealing with inflation below its 2% target. Rieder said inflation can drift a little higher.
But "it's very hard to get pricing power for companies in a technology-oriented, data-centered environment. ... The backdrop for the Fed is you can structurally be at lower rates because inflation is not going to go significantly higher for a long time,' he said.