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Policy matters

Aug 14, 2019

Our views on the Fed’s moves.

Investor expectations for lower interest rates globally, positive corporate earnings and better-than-feared economic data helped push U.S. stocks to fresh highs in July. The initial analysis of second-quarter U.S. economic data confirmed the consumer remains strong, offsetting manufacturing weakness.

Later in the month, the Federal Reserve lived up to expectations and cut its policy rate for the first time in 11 years. However, investors were left disappointed as Fed Chair Powell indicated future cuts would depend on the data and this was not the start of a broader easing cycle. The Treasury yield curve flattened, the dollar rallied to its strongest level in over two years, and the S&P 500 Index saw its worst day since May.

This backdrop is reminiscent of the environment we have experienced for much of this expansion – low interest rates globally fuelling demand for income-generating asset classes. Given our view that rates will remain low for the long term, we believe income-oriented investments will continue to be rewarding within a diversified portfolio as investors’ search for yield continues. This is especially true for investors overseas, where a large percentage of government bond yields are negative.

With the recent escalation of trade tensions, we maintain a more measured outlook for risk-taking in the BlackRock Multi-Asset Income Fund. We believe recession risk is muted and easy monetary policy will support the ageing expansion, but the evolution of trade is more difficult to predict, and tensions are unlikely to disappear any time soon. Therefore, monetary policy will continue to play an important role in market performance.

In September, we expect another rate cut in the U.S and policy intervention in Europe. Even though U.S. growth has recently stabilized, it’s hard to envision it improving enough to deter the Fed from cutting again. Thereafter, we anticipate further rate decisions to be heavily influenced by the trade backdrop, growth and inflation data.

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Michael Fredericks
Head of Income Investing for BlackRock Multi-Asset Strategies Team
Michael Fredericks, Managing Director, is head of Income Investing for the Blackrock Multi-Asset Strategies group and lead portfolio manager for the Multi-Asset Income, ...