BlackRock's Rieder says Fed will tighten policy, so investors need to be conservative for now

Published Tue, Jan 25 202212:48 PM ESTUpdated Tue, Jan 25 20222:32 PM EST

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

BlackRock bond chief Rick Rieder said financial conditions have tightened more quickly than expected, so Federal Reserve Chair Jerome Powell could take a more cautious tone even as he pushes toward raising interest rates. Stocks plummeted as the Fed began its two-day meeting Tuesday. Since the start of this year, the stock market has become extremely volatile, with the Nasdaq Composite down more than 14.5% and the S & P 500 off 11.4%. "I think the Fed was comfortable seeing financial conditions tighten a bit from what was extraordinarily easy levels, but I think a bit of tightening of financial conditions has moved much faster than anybody would have thought," said Rieder, chief investment officer of global fixed income for BlackRock, the investing behemoth that manages $9.5 trillion for clients. The central bank's Federal Open Market Committee is scheduled to release its post-meeting statement Wednesday at 2 p.m. Powell will brief the media a half-hour later. The statement is expected to signal the Fed is ready to begin raising short-term interest rates from near-zero, possibly as early as March. The Fed is also expected to remain on course to end its bond purchases , or quantitative easing, in the next two months. Rieder expects Powell also to be asked about the Fed's intention to shrink its balance sheet, but does not expect to hear much detail. "I think he's going to be dovish relative to expectations, and I think they'll be very clear about meeting the conditions to ending the quantitative easing, finally. And he'll say we're ready to start raising rates away from emergency conditions, more to a normalized set of monetary policy," Rieder said in an interview. As for his investing view, Rieder said it's a time to be conservative for the next couple of months while the markets adjust to the Fed and investors get a better view of whether the economy is hitting a softer patch. He described the market's retracement as "severe" and that there is a high lack of conviction among investors. "I think the market will take some comfort in a Fed that is interpreting the data, adjusting policy but not panicked about policy," he said. "There is the risk and the concern among most market participants that they feel like they've got to be more aggressive .. .and they're way behind the curve." He expects the market to remain volatile for now. "When you tighten, you need to land the plane softly. Landing the plane softly is not dropping it out of the sky, hitting the brakes and putting it in reverse," he said. "If they started earlier, they could have landed the plane a little easier." As for investors, they need to remain cautious. "I think now you still have to be deliberate," Rieder said. "I don't want to be aggressive. Investors are realizing today I think the right paradigm is to be conservative in your portfolio positioning and [quantitative easing] is a lot more fun to be long financial assets in. I think you have to be conservative for a bit of time." Four rate hikes? While the futures market shows investors expect four quarter-percentage-point interest rates hikes this year, Rieder said the soft patch in economic data has created uncertainty around the Fed's ability to proceed with that many hikes. But he does not expect Powell to discourage investors from expecting four hikes. "Because of my view that you have a moderating economy, and it will be data dependent, I'm just not convinced they're going to get the full four done," he said. He added that four is close to the Fed's own forecast of three hikes this year. "I don't think he's going to dissuade that ... I don't think he discourages the four." Rieder said markets have been affected in part by concerns about Russia's military threat against Ukraine this week. But for the most part, the market is responding to the idea that the Fed could be tightening more aggressively while the economy could be slowing. Retail sales fell a surprising 1.9% in December, and other data has also been weak. Rieder said it will take more employment and inflation reports to determine the economy's direction. Some of the upcoming inflation readings could spook investors, he said. In December, the consumer price index shot to a 12-month gain of 7% , the highest since 1982. "We won't know the answer to this for a couple of months, but that uncertainty of what looks like weakening data and a more aggressive tightening Fed has caused the market to seize up at times," he said. He expects Powell to acknowledge the weaker data, but also make the point that the Fed will make keeping the recovery in tact a priority. Rieder said the Covid omicron variant and supply chain issues have had an impact on growth. "Managing inflation and attempting to slow down the rate of inflation which they describe as being less transitory is going to be job one, but I think it's going to be very much married to preserving the recovery," he said. How to invest Rieder expects markets could remain volatile for several months and he has been taking a cautious stance, holding more cash than he ever has in some portfolios. "I just think the fear and the unconvicted nature of the market is creating extraordinary volatility, and I just think it's so hard for people to step in and buy it," Rieder said. "And it just gaps and when the sellers stop, it gaps the other way. The liquidity in the market, the top-of-book liquidity that sets price, is unbelievably thin. It's incredible." Rieder added traders are probably going to be short the market, looking for more downside. "But if you're a long-term investor the market has become attractive in a number of places," he said. "I don't think this is an aggressive buying opportunity now. I think we've got more to learn." He said he is focused on quality paper. He favors investment-grade bonds and has been selling high-yield. "Today, you could hide in the two- to five-year part of the curve, get a nice yield to it. Buy some quality spreads on top of it, some securitized assets around residential and commercial real estate assets," Rieder said. The investing environment is the opposite of a year ago, he noted. "You couldn't own any high-quality assets [then]. Rates were at zero and spreads were tight." In the stock market, high-quality tech with strong cash flow is an area he likes. "I think some of the extreme pressure on tech is overdone. The ones that are throwing off real cash flow, that are real growth businesses, that is overdone. The industrials make a lot of sense. The autos, the more traditional autos, have a great runway ahead of them," he said.

Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income, speaks during a Reuters investment summit in New York, November 7, 2019.

Lucas Jackson | Reuters