Markets Are Wrong on US Rate-Cut Bets, BlackRock Says

The Federal Reserve will keep raising interest rates despite traders betting otherwise as fears of a banking crisis convulse markets, as stubborn inflation will provide more challenge to the Fed due to a tight labor market, according to BlackRock Inc.

The world's largest money manager favors inflation-linked bonds — securities that offer protection against rising prices — on the belief that markets are incorrect in expecting imminent US rate cuts as the economy slips into a slump. This time is different as the Fed and its peers have made clear that troubles buffeting the banking sector won't halt their battle against inflation, BlackRock Investment Institute strategists including Wei Li wrote in a client note.

Yields on US two-year notes — among the most sensitive securities to changes in central-bank policy —rebounded this week from near the lowest levels this year as jitters around banking-sector contagion ease. While investors have returned to pricing in the possibility of a quarter-point Fed hike in May, they are also betting that markets aren't out of the woods yet, and thatthe Fed may ease by 65 basis points by year's end.

Recent speech given by Federal Reserve Governor Philip Jefferson added credence to BlackRock's view.