The US will avoid a recession but rising rates and slowing growth aren't a supportive environment for investors, says iShares investment chief

Phil Rosen

June 7, 2022 5:04 PM

The US won't hit a recession because the Fed will be able to tame inflation, a top iShares exec said.

Fed Chair Jerome Powell.

The labor market shows demand for workers is outpacing available workers, which means the Fed could move to reduce labor demand.Fed tightening means more volatility for investors though, and a climate of lower returns, she explained.

The Federal Reserve will be able to avoid a recession and also reduce inflation, though investors will face lower returns ahead, according to Gargi Chaudhuri, head of iShares investment strategy, Americas.

The central bank forecasts inflation to drop significantly by 2023, and Fed Chair Powell has signaled that, while it is a challenge, he believes the Fed can accomplish a soft landing for the economy without triggering a recession.

In emailed comments, Chaudhuri highlighted that demand for labor is outpacing the available labor resources, with nearly double the job openings as there are unemployed workers.This gives the Fed room to alleviate some inflationary pressures by moving to reduce labor demand, she explained.

"Successfully skimming the froth from the labor market would give the Fed time to tighten policy at a more deliberate pace," Chaudhuri said. "This is important to investors because much of the impact of monetary policy is transmitted to the real economy via financial conditions (lower equity prices, wider credit spreads and higher interest rates)."

More aggressive tightening from the Fed, she noted, could bring on more market volatility for investors, however, even if a recession doesn't happen.

As a result, she recommends shorter-dated fixed income assets as well as companies with strong balance sheets and pricing power. Meanwhile, she's bearish on cash-flow challenged technology and industrial stocks as higher rates and slower growth should weigh on lower quality and cyclical companies.

"Rising rates and slowing growth are not a supportive environment for investors, so it is unlikely that equity or fixed income returns will match the stimulus-fueled returns of the past two years," she said. "In a climate of lower, more volatile returns, investors should instead focus on relative returns within asset classes."

Phil Rosen