BlackRock: Interest Rates Will Remain Depressed for Longer Than Anticipated

interest ratesBlackRock analyst Rick Rieder explained recently why the world’s largest asset manager is betting that interest rates will stay low for the next several months — and perhaps many years.

In a recent post, Rieder noted that the most obvious reason for continued low rates are the extremely dovish actions of central banks overseas. With negative interest rates becoming the norm around the globe, the Fed is under no pressure to raise rates here at home.

There’s another factor most people aren’t taking into consideration, however: weakening jobs numbers. “Perhaps more importantly, closer to home, there’s one more reason we should expect interest rates to be lower for longer: The strong pace of U.S. jobs growth seen over the past few years has moderated recently and is unlikely to be sustained at historically high levels, as reduced corporate profits and political,” said Rieder.

Although June’s jobs reports number looked good, if you take the average of May and June together, things don’t appear as rosy.

Rieder notes, “April and May jobs numbers, when combined, were revised slightly downward by a total of 6,000 fewer jobs than previously reported. In addition, the most recent payrolls print brought the 3-month, 6-month and 12-month moving average payroll gains to 147,000, 172,000 and 204,000, respectively. While these levels are modestly higher than May, they still show a slowing trend.”

As state and federal governments inch closer to boosting the minimum wage, the effect could be negative for businesses. In turn, hiring could suffer as well:

“When wage costs are increased through policy rather than via market mechanisms, revenues and profits can take a hit unless businesses have the pricing power to charge customers more. The net result could well be lower levels of hiring in strong areas of jobs growth, such as the leisure and hospitality sectors.”

In summary, the Fed is no doubt trying to peg a “peak jobs” number while factoring in potential wage gains. Even if they do raise rates this year, which BlackRock still believes they may try to do, the longer-term outlook is for continued low rates for the foreseeable future.

The iShares Barclays 20+ Yr Treas.Bond ETF (NASDAQ:TLT), which has gained nearly 16% year-to-date, fell $0.73 (-0.52%) to $138.86 per share in early trading Friday.

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