BlackRock: Fed Funds Is on Its Way to 2%

Friday’s disappointing jobs report had a lot of noise in the numbers, but one message is loud and clear: The Fed is on a path to keep raising rates.

Rick Rieder, BlackRock‘s chief investment officer of global fixed income, thinks the Fed has leeway to raise the fed funds rate to 2% — that means at least three more rate hikes from the current 1.25% level.

This is even though the U.S. lost 33,000 jobs, much more than expected, in September. Rieder says the Fed should “look past” that terrible number because it was mainly due to the hurricanes. He writes in a Friday commentary:

Keep in mind most of this decline is attributable to a -105,000 jobs loss in the food/drink services industry, and that is roughly 130,000 lower than the trend gain in that industry over the last year.

Some of the wage gains last month were also due to the hurricanes, he notes. But the U.S. Median Weekly Earnings data and the Atlanta Fed Wage Tracker show a surge in wages that the payrolls data misses.

What does that mean for the Fed? He explains:

Not only do we think that the door is still open for another rate hike in December, but unless inflation from here is very, very soft, or U.S. (or global) economic growth expectations turn down markedly, the Fed is very likely to raise policy rates another 25 basis points at that meeting. Indeed, all but four of the FOMC’s “dots” indicate that another rate hike this year is appropriate. Additionally, we think that the central bank is very likely to move rates higher another two to three times in 2018. In short, we think that the road to the 2% policy rate level should rightly be attained, and then the Fed could pause then to reevaluate. Moving from emergency rate conditions, given the incredible growth in employment and stable inflation, continues to make a lot of sense.


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