BlackRock warns that investors are making a mistake by betting on the Fed to cut rates

Investors are too confident the Federal Reserve will cut interest rates this year and could pay the price later, according to asset management giant BlackRock and others on Wall Street.

Market pricing as of Tuesday morning pointed to the Fed holding its benchmark interest rate at current levels and then starting to reduce as early as July, according to CME Group calculations. Those cuts could total as much as a full percentage point by the end of the year, the firm’s FedWatch gauge shows.

That comes despite multiple public statements from central bank officials, who indicated in their “dot plot” unofficial forecast last week that they see probably another quarter percentage point hike and then no cuts at least through the end of 2023.

The expectation for cuts would be consistent with a recession and an accompanying fall in inflation, assumptions that Wall Street strategists think are dubious.

“We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” BlackRock said in its weekly client note. “Now they’re causing the recession to fight sticky inflation and that makes rate cuts unlikely, in our view.”

The investing implications are ominous: BlackRock, which manages about $10 trillion in client money, says it is underweight stocks in developed markets such as the U.S. Instead, it recommends clients focus on investments like fixed income that is indexed to inflation, as well as very short-duration government bonds.

Resilience in stocks, the firm said, is coming largely because markets are still holding onto hope that the Fed starts to ease after a year of tightening that sent the benchmark federal funds rate up 4.75 percentage points.

“We think the Fed could only deliver the rate cuts priced in by markets if a more serious credit crunch took hold and caused an even deeper…