Fed Chair Powell may lean hawkish on inflation, but stocks have ‘tremendous’ technical backdrop, says BlackRock's Rick Rieder

Most of Federal Reserve Chair Jerome Powell’s messaging to markets on Wednesday may lean toward hawkish monetary policy, but that might not keep a lid on stock prices for very long after any potential pullback, according to BlackRock’s Rick Rieder.

The Fed is widely expected to announce on Wednesday that it’s raising its benchmark interest rate by a quarter percentage point to a target range of 5.25% to 5.5%, in an effort to lower elevated inflation. Investors will be listening closely for how Powell speaks to the balance of risks involved in tightening the Fed’s monetary policy to rein in the rising cost of living in the U.S. to its 2% target, according to Rieder.

The Fed has slowed its rate hikes this year after rapidly lifting them in 2022. Now investors will be focused on whether Powell thinks another rate hike this year may be needed after July, as well as the Fed Chair’s description of the pace of getting to another potential rate rise later in 2023, according to Rieder.

Full employment is one of the Fed’s dual mandates, said Rieder, along with price stability in the economy. In his view, inflation, which had spiked because of a “massive supply shock” during the pandemic, may continue to come down if the Fed patiently waits for its past rate increases to “marinate through the system.”

For example, Edward Yardeni, president of Yardeni Research, told MarketWatch in May that “the last two rate hikes were nuts” after the Fed’s rate increase that month. And Campbell Harvey, director of research at Research Affiliates, said in a June interview with MarketWatch that the U.S. may be in “the lull before the storm” while expressing worry that the Fed’s continued rate hikes this year raised the odds of a “hard landing” for the economy.

Investors have the opportunity to own high-quality assets in the bond market with very short durations to get some yield, while buying some equities for “upside,” according to Rieder. “That’s much more attractive than owning a lot of long maturity bonds,” he said.

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