BlackRock Has Fed Blockhead Concern That Differs From Gundlach’s

If you listen to investing titans Jeffrey Gundlach and Ray Dalio, you’ll hear warnings of U.S. economic decline should the Federal Reserve hike interest rates too soon.

If you give your ear to BlackRock Inc.’s Rick Rieder, you’ll get the opposite concern: The Fed isn’t raising borrowing costs quickly enough.

“Keeping rates excessively accommodative almost certainly holds an increased risk for markets,” Rieder, chief investment officer of fundamental fixed income at the world’s biggest money manager, said in an e-mailed statement Wednesday. “Fed policy today is penalizing savers and holders of cash” and distorting asset prices.

After more than six years of near-zero rates in the U.S., investors face a dilemma of whether to keep preparing for them to go up or to follow the masses into riskier and riskier securities just to get some yield.

Fed Chair Janet Yellen laid the groundwork for a rate increase on Wednesday by removing central bankers’ pledge to be “patient” in tightening policy, while also downgrading her assessment of the economy and forecasting a slower increase to benchmark borrowing costs.

Bond traders took this to mean the Fed is pushing back the timing for when it will actually raise rates. Yields on 2-year Treasuries plunged the most since 2011 to 0.55 percent on Wednesday, while shares of the biggest junk-bond exchange-traded fund surged the most this year. The Standard & Poor’s 500 Index of stocks rallied 1.2 percent.

1937 Selloff

This may give more confidence to folks like Gundlach, who heads DoubleLine Capital LP, and Dalio, founder of the world’s largest hedge fund firm, Bridgewater Associates.

Dalio said this month that Yellen could spark a rout similar to that of 1937 by raising rates too quickly.

“We don’t know -- nor does the Fed know -- exactly how much tightening will knock over the apple cart,” Dalio and Mark Dinner wrote in a note to clients dated March 11. “It would be best for the Fed to err on the side of being later and more delicate than normal.”

Gundlach, meanwhile, said this month that the Fed is intent on being “a blockhead” and hasn’t learned from errors made by its global counterparts, which have raised rates too soon and then had to cut them. He said he was referring to the game he played as a child where participants build a tower from blocks without it collapsing on their turn.

For BlackRock’s Rieder, however, the prolonged low-rate environment is a big risk.

“We strongly suggest that Fed rate normalization will not only be borne well by the economy, but that it may actually hold a positive impact,” Rieder said in this week’s statement. “In many respects this degree of ‘emergency’ accommodation has overstayed its welcome.”

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