BlackRock Inc.’s Rick Rieder has some advice that stands out from conventional wisdom: The best way for the Federal Reserve to curb inflation is to lower rates of interest, not to maintain them higher.
That’s because well-heeled Americans are earning more on fixed income than they’ve in years as rates of interest remain at their highest levels in a generation, said Rieder, chief investment officer of world fixed income at BlackRock.
“I’m not sure raising interest rates actually reduces inflation,” Rieder told Bloomberg’s David Westin in an upcoming episode Wall Street Week will air on Friday. “In fact, I would argue that lowering interest rates actually lowers inflation.”
Middle- to upper-income Americans “receive a lot of benefit from these interest rates,” he said. “We’re moving to a service-based economy, more money is being spent on services, but what’s actually happening – because the prices of goods have fallen so much – is allowing disposable income to flow into services.”
Rieder pointed to ongoing inflation in all service sectors equivalent to automobile and medical health insurance as evidence. “They are unresponsive to interest rates and people are spending money — older people, middle- to high-income people — keeping services inflation at high levels.”
“The price of a pair of tennis shoes is the same as it was 20 years ago. If you go to a tennis match, the price is double what it used to be,” he added.
Still, not all market watchers are willing to overturn a fundamental tenet of monetary policy – that higher borrowing costs ultimately dampen economic activity and subsequently inflation.
“A lot of the inflation that’s coming down now, I think, is not due to the rate hike, at least not at its peak,” said Seth Carpenter, chief global economist at Morgan Stanley. told Bloomberg Surveillance on Friday. “But I personally am skeptical that everything – the empirical literature on how monetary policy works – is simply wrong. I wouldn’t agree with the basics.”
Bond markets gathered Wednesday after a report showed that overall consumer price growth slowed in April, with swap traders increasing their bets that the Fed will ease rate of interest cuts by as much as two quarter points in December. But inflation data has also shown that there’s price growth in some areas of the service economy – from housing costs to automotive insurance and medical care prove harder to tame.
Still, “the worst fears have been dispelled,” BlackRock’s Rieder said with the discharge of April’s CPI data. “As long as you have price stability, employ a lot of people, expand the workforce and slow down a little on the growth side, that’s pretty good.”
