BlackRock’s Conway: Central banks need to be careful with ‘aggressive’ rate hikes

The US Federal Reserve’s recent decision to raise interest rates is consistent with what the central bank needed to deliver. It should now be wary of taking hikes too far, says Edwin Conway, senior managing director at BlackRock and global head of BlackRock Alternative Investors.

Speaking to Private Equity International on the sidelines of SuperReturn International in Berlin last week, he added the issue the world is facing is that inflation has been driven by different factors relative to previous iterations of rate hikes.

“This is very much supply chain-driven. As a world, we are experiencing tremendous demand for many things, and there’s a tremendous shortfall as a result of the global pandemic we’ve just been living through,” Conway said.

Nearshoring and onshoring conversations have also been a factor, as governments look to lessen their dependency on other nations in the wake of Russia’s invasion of Ukraine.

The Fed announced last week it would raise its benchmark policy rate by 0.75 percentage points in an effort to tackle inflation, which is running at its highest level in the US in four decades. It was followed by the Bank of England, which announced a day later it would increase the UK’s bank rate by 0.25 percentage points to 1.25 percent.

Conway’s fear is that central banks go too far in interest rate hikes. “Inflation can pull back quite quickly. Do we get to the Fed’s target 2 percent [inflation]? Not for a while, that’s for sure. But can we get back to more modest levels? It absolutely can happen, and actually quite quickly in the coming one to two years,” he told PEI.

“The balancing act the Fed needs to play between now and that moment of time is trying to avoid a hard landing whilst instituting aggressive rate hikes. They’ve got to be very careful – that hard landing is highly likely.”

Nick Brooks, head of economic and investment research at ICG, told PEI last year: “If [rate rises] were to happen and we were to see yield curves shift, that would obviously affect a lot of companies that have a lot of leverage.

“To the degree that GPs are concerned about that risk… clearly, they need to be looking at the leverage levels of the companies they’re invested in and be working with them to try to reduce these risks.”

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