Keeping rates low risk for US markets
The "breathtaking strength" in US jobs growth has created conditions that demand a rate hike, argues Rick Rieder, chief Investment officer of fundamental fixed income at BlackRock.
The February job creation figure of 295,000 exceeded the consensus estimate and was similar to the 3, 6 and 12 month moving average of payroll gains, Rieder wrote in a research note.
The job gains came despite layoffs in the oil and gas industry and winter storms, putting the unemployment rate at 5.5%. Moreover, BlackRock believes wage growth will see a "modest acceleration" later this year.
"The last time that 12-month jobs growth was as strong as it is today, the Fed's policy rate stood at 6% (versus near zero), and we strongly suggest that Fed rate normalisation will not only be borne well by the economy, but that it may actually hold a positive impact, while keeping rates excessively accommodative almost certainly holds an increased risk for markets."
The probability of a US interest rate hike in June is now 55%, Rieder believes. In September, the probability is 35%, and at the end of the year, 10%.
Because a rate hike is already priced into the market, market disruption will be minimised and there will be no negative impact on the broader economic recovery, he added.
"[W]e may actually discover that rate normalisation has some positive economic influences, as the distortive aspects of recent monetary policy give way to a more natural state of affairs."