How to Invest While Federal Reserve Interest Rates Remain High

• All eyes will be on the Fed to see how high Jerome Powell will raise interest rates.
• BlackRock’s Gargi Chaudhuri sees a 75 basis point hike and doesn’t see a rate cut until 2024.
• Investors should buy high-quality stocks in defensive sectors, as well as inflation-linked bonds, she said.

From persistent supply chain bottlenecks to tech stock crashes to rising European energy crisis, the market faces considerable disruption in 2022. But so far, none of these headwinds has exactly matched the trajectory of damage left by inflation raging.

According to Gargi Chaudhuri, head of investment strategy at BlackRock’s iShares Americas unit, the unit currently manages about $2.13 trillion in assets. “Inflation will continue to be front and center driving markets,” she told Insider in a recent interview.

With Fed Chairman Jerome Powell double Regarding his determination to control inflation at last month’s Jackson Hole conference, Chowdhury argued, 75 basis points of rate hike Looks like it could be at the September FOMC meeting. While some investors have already priced in a 100 basis point hike, a rate hike of more than 75 basis points could roil markets rather than send the expected assurance signal.

“They want to sound decisive, but don’t panic,” she explained, emphasizing the time lag the Fed wants to allow its policy actions to play out across the economy.This means the full range of central bank monetary tightening action – including its current Balance Sheet Shrinking — and their impact on a potential slowdown in consumer demand or a recession will not be felt for at least the next few months.

Don’t expect rate cuts until at least 2024

Given the central bank’s hawkish stance, Chowdhury believes that in fact Interest rates cannot be lowered Anytime in 2023.

“In the past, loosening policy too quickly after raising it was not the right thing to do,” she explained.

“Then when the economy slows — and we’re obviously going to start seeing signs of that in the data — that’s when they start cutting rates, and I think the dot plot shows that’s happening in 2024,” Chaudhuri continued, adding Said she expected to cut rates by at least 50 basis points by 2025.

Buy quality defensive stocks and front-end bonds

With higher rates at least until next year, Chaudhuri believes investors will continue to see some “weakness” in the real economy.

“I think it’s become more difficult for certain parts of the market — especially certain areas of the equity market — but it also creates some value in the fixed income market,” she said. Over the next few months, she urged investors to prioritize protecting their portfolios from heightened volatility.

On the fixed income side, Chaudhuri stressed that the attractive opportunity for investors lies in shorter-duration bonds, which currently carry high spreads, meaning investors can earn substantial amounts of money simply by buying and holding these front-end assets. return.because The yield curve remains inverted Right now, investors can actually get higher yields from short-term bonds while taking on less interest rate risk than bonds with longer maturities.

Specifically, Chaudhuri advises investors to consider short-term bonds such as 1-, 2-, and 3-year U.S. Treasuries, 1- to 5-year investment-grade corporate bonds, and inflation-linked front-end bonds.

As for equities allocation, Chowdhury advises investors to position themselves defensively by buying high-quality assets that are more recession-proof. “Low or minimal volatility stocks give you more downside protection, reducing your risk in your portfolio,” she explained.

From an industry perspective, the highest quality assets belong to health care and Pharmaceutical Industry, as both are traditionally more recession-proof and have a strong ability to generate cash flow. Chaudhuri recommends these two sectors over consumer staples, which has traditionally performed well during recessions but may not necessarily perform well in this particular high-inflation environment, which she said could cut into the company’s profit margins.

“Health care is more attractively priced and still gives you that quality, which means these companies are likely to do better even if inflation continues into next year,” Chowdhury said.