Rick Rieder (Rick Rieder), BlackRock's chief investment officer for global fixed income, made a suggestion contrary to popular opinion. “I'm not sure that raising interest rates will actually reduce inflation. In fact, I think if interest rates are cut, it will actually reduce inflation.”

That's because, according to Reed, since the benchmark interest rate remains at its highest level in a generation, wealthy Americans are earning more from fixed income investments than in years past.

He said middle- to high-income Americans “benefited immensely from these interest rates.” “We are moving towards a service-oriented economy, where more money is being spent on services. Since commodity prices have dropped drastically, this allows disposable income to be used for service consumption.”

Using the continued high inflation in service industries such as auto insurance and health insurance as an example, Reed pointed out that these sectors are not sensitive to interest rate adjustments, and stated that “people are spending — the elderly, middle- and high-income groups are spending — causing service sector inflation to remain high.”

He also added, “The price of a pair of tennis shoes is about the same as 20 years ago. But if you go to a tennis match, it costs twice as much as before.”

On Wednesday, as reports showed that overall growth in the US consumer price index (CPI) slowed in April, the US Treasury bond market strengthened, and swap traders increased their bets that the Federal Reserve may cut interest rates by 25 basis points twice before December. However, inflation data also shows that in some areas of the service economy, such as housing costs, auto insurance, and health care, price growth is still difficult to control.

Despite this, Reed believes that “with the release of April CPI data, the worst concerns have abated.” As long as prices remain stable, employment is plentiful, the size of the labor force is expanded, and growth moderately slows down, “the situation is pretty good.”

Traders' interest rate cut bets also coincide with Reed's views in April. Reed said that as inflation slows in the next few months, the Federal Reserve is expected to cut interest rates twice this year. “It's getting harder and harder for officials to do this, but I still think they can.” He said that bond investors, who have suffered unspeakably from rising US Treasury yields, are expected to soon find some comfort from slowing inflation and the Federal Reserve.

Reed said earlier that BlackRock has cut its interest rate exposure and is investing more on the short term. Once it sees a few good inflation reports and evidence of employment slowing, it can start extending the long-term period.

Editor/Jeffrey