NEW YORK (Reuters) - The Federal Reserve will likely not cut U.S. interest rates as deeply as the bond market expects due to a resilient economy and inflation remaining sticky, the BlackRock (NYSE:BLK) Investment Institute said in a note on Monday.
The U.S. central bank is expected to cut interest rates for the first time in over four years on Wednesday, with speculation over the size of the first rate cut creating volatility across financial markets in the run-up to the decision.
Traders in rates futures are betting on about 120 basis points in cuts this year and a total of 250 basis points by the end of 2025. This would bring interest rates to about 2.8%-2.9% by the end of next year from the current 5.25%-5.5% range.
A reduction in interest rates of this magnitude reflects recession fears that are overdone, as well as expectations of a sustained decline in inflation which, instead, is likely to cool off only temporarily, said the institute, an arm of BlackRock, the world's largest asset manager.
"As the Fed readies to start cutting, markets are pricing in cuts as deep as those in past recessions. We think such expectations are overdone," it said.
Despite a recent uptick in unemployment, employment is still growing, and supply constraints will continue to put upwards pressure on prices, it said.
"An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term," it said.
The institute is underweight, or bearish, on the prospects of short-term U.S. Treasuries as current yields reflect expectations of deep rate cuts.
It maintains an overweight on U.S. stocks, instead, on optimism around the impact of artificial intelligence.