BlackRock's Rieder says the Fed could start to raise interest rates next September

Published Tue, Nov 2 20214:03 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

BlackRock's Rick Rieder said he expects the Federal Reserve will begin raising interest rates in September of next year, and hike as many as four times more by the end of 2023. "I think the market has probably overshot on the amount they are going to do, but I think they are going to raise rates one to two times next year," said Rieder, who is chief investment officer of global fixed income at BlackRock. Rieder, speaking in a telephone interview Monday, said he expects two to three more rate hikes in 2023. The Federal Reserve was meeting Tuesday and is expected to announce Wednesday that it will begin paring back its $120 billion per month bond buying program. That tapering is expected to end by mid-year 2022, and markets are anticipating the Fed starts hiking interest rates as early as June. Rieder said the front end of the Treasury yield curve was also pricing in too much Fed tightening. The 2-year note yield, at a recent high of 0.53% Monday, slid back to 0.45% Tuesday. "I think the front end is now pricing in too much, but if [Powell] doesn't push back or he doesn't agree with that publicly you could push the front end back a bit further," he said. Other central banks have begun to sound more hawkish, and the Bank of England is expected to raise interest rates this week. Rieder noted that European Central Bank president Christine Lagarde did not push back on higher rates in Europe. Rieder said if Powell does not push back on the market's rate expectations "that certainly opens the door that the markets could be right and that could certainly pressure the front end." Rieder said the stock market could react slightly to the taper, especially if Powell sounds hawkish in his comments. If the chairman should emphasize the Fed could speed up its winding down of bond purchases that could impact markets, but Rieder does not expect the Fed chair to say that Wednesday. "The taper is expected and will not be disruptive," he said. "Markets could give up a couple of percent or so, but I think the markets already know inflation is going to be stickier. If the interpretation is he's saying he's going to raise rates faster, I think markets could come down a bit more than that. I think people underestimate the demand we see almost every week. The demand for return, the demand for equities. So I don't really think you come under any significant pressure." Rieder said he expects some inflationary pressures to ease and some prices are already coming back down. "As long as the Fed will keep moving policy in landing the plane in a gradual manner, but persistent manner, markets will be in good shape," he said. "The bigger threat to the market would be if the Fed did not start to taper or address inflation and wages kept rising. Rieder said he does not expect a big move in the 10-year yield for the balance of this year. The 10-year was at 1.54% Tuesday, after recently touching a high of 1.70% in October. "I still think we're going to be at 1-5/8%, 1-3/4% on the 10-year. I don't think we're going much higher because I think the Treasury can cut the amount of coupon issuance," said Rieder. He noted that the economy is strong, so tax reveneus are high and the Treasury would not need to issue as much debt. "And the demand that comes in at these higher yields is still significant.," he said. "Every time rates back up, you see this incredible wave of buying that comes in from pension funds, insurance companies, international investors, so I think rates should move a bit higher given the fact that inflation is going to be sticky high, real rates are exceedingly low and you've got a Fed that's in a closer to tightening mode." The stock market has been sensitive to moves in the benchmark 10-year yield, and tech, in particular has been impacted when the 10-year yield moves higher. "I think rates could go higher and are going to go higher but not enough that it's going to disrupt the risk markets," said Rieder. Rieder says investors may be surprised by the resilience of stocks. "Equities do really well If inflation is 2% to 3% in aggregate over the medium term," Rieder said. "If some of these shocked inflation numbers come down, and we're moving to a moderately higher sticky inflation, to equity markets that is nirvana, as long as we have a central bank that recognizes it and doesn't let policy create an overheating dynamic."

Rick Rieder

Olivia Michael | CNBC

BlackRock's Rick Rieder said he expects the Federal Reserve will begin raising interest rates in September of next year, and hike as many as four times more by the end of 2023.