As Powell's Last Dance Likely Approaches, BlackRock Sees No Fed Rate Change And Says Inflation Trouble Predates Iran War

• The Federal Open Market Committee is slated to announce its interest rate decision on Wednesday.
• BlackRock noted that inflation pressures predate the Middle East supply shock, which is weighing on central banks across the globe. 
• The asset manager said that structural factors are keeping U.S. labor markets tight, while an AI-driven investment boom and tariffs are adding to price pressures.

The Federal Reserve is caught in a tough trade-off between stubborn inflation and the need to support economic growth and is likely to keep rates unchanged at the upcoming policy meeting, according to BlackRock.

“We expect the Fed and other key central banks to leave policy rates unchanged this week as they face a tough trade-off between growth and inflation,” the asset manager said in its latest weekly commentary.

The Federal Open Market Committee is slated to announce its interest rate decision on Wednesday, with most expecting the committee to hold the key rate steady at 3.5%-3.75% in what may be Jerome Powell's last meeting as Chair of the U.S. central bank.

BlackRock Flags Risks For Fed

BlackRock noted that inflation pressures predate the Middle East supply shock, which is weighing on central banks across the globe.  “Markets projected U.S. rate cuts before the Iran war erupted – and ignored signs that inflation’s downward trend had already stalled as core services inflation remained stubbornly high,” the risk management firm said.

BlackRock said structural factors like an aging workforce and tighter immigration are keeping U.S. labor markets tight, while an AI-driven investment boom and tariffs are adding to price pressures, which have kept core inflation above the Fed’s target.

Recent supply disruptions amid the U.S.-Israel war have further pushed up energy and input costs, prompting markets to abandon expectations of U.S. rate cuts this year. “This shift reflects a recognition that inflation is running above pre-pandemic levels – a trend we see persisting for now,” it said.

“No change in policy rates is expected, and the key is to watch for signs whether policymakers are growing concerned about persistent inflation, even if they look through price pressures caused by Middle East supply disruptions,” BlackRock added.

What Are Markets Expecting From Fed?

The asset manager’s views seem in line with market expectations. According to data from the CME FedWatch tool, there is a 100% probability that the Fed will hold rates steady this week, up from 95.9% last month.

However, Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business, had said earlier this month that the chances of the Federal Reserve hiking rates soon “are no longer negligible,” in light of the rising oil, diesel, and fertilizer costs.

Crude oil prices have soared since the start of the war in Iran, with Brent crude futures now trading near $110 a barrel. The United States Oil Fund (USO), which tracks the prices of the West Texas Intermediate (WTI), was up 0.88% in the overnight trade.

Meanwhile, in a Stocktwits poll asking what could be the main driver of the market this week, 15% of the 6,400 users who voted expect the Fed’s policy decision and other economic data releases to impact markets.

U.S. equities have swung violently in recent weeks. On Monday, at the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up  0.07%, while the Invesco QQQ Trust ETF (QQQ) declined 0.06%. The SPDR Dow Jones Industrial Average ETF Trust (DIA) edged up by 0.10%.

Retail sentiment on Stocktwits around the S&P 500 ETF was in the ‘bullish’ territory.

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