(Bloomberg) — BlackRock Inc. Vice Chairman Philipp Hildebrand said investors’ bets on US interest-rate cuts will prove excessive once inflation turns out to be stickier than anticipated.
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Speaking on Bloomberg Television at the World Economic Forum in Davos, the former Swiss National Bank president said that the rapid slowdown in consumer-price growth is giving financial markets a false sense of security about underlying pressures.
“Goods inflation is going to continue to drop quite rapidly — we have now negative numbers — and that basically brings down the overall inflation numbers quite dramatically,” he said. “As a result, the markets have now priced in what I think is probably excessive interest-rate cuts in the US.”
Money markets are betting on six quarter-point reductions at the Federal Reserve this year and more than a 50% chance of a seventh move, according to swaps tied to policy-meeting dates. The first such cut is expected by May.
Hildebrand warned that investors will soon enough find out that such an outlook is mistaken.
“I’m a little worried we’re sort of priced for near perfection, sort of almost a perfect soft landing where inflation is gone as a problem,” he said. “At some point we’re going to realize that it’s not that easy to stabilize to the 2% inflation targets that central banks are looking for, and so the optimism in rates in the US in particular is probably overdone.”
In particular, Hildebrand warned that price increases in services are still prevalent and that wages are increasing rapidly. That will limit how far policymakers can aid households and businesses as amid anemic growth.
“There is going to be weakness in the economy, there’s no question about that, but I think what central banks will find, particularly in the US, that they won’t have as much room to cut as is currently priced in.”
–With assistance from James Hirai and Loukia Gyftopoulou.
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