NEW YORK — The Federal Reserve raised its target range for the federal funds rate by 25 basis points in September, the first increase since July 2023, setting the new range at 3.75% to 4.00%. BlackRock's historical analysis suggests the move need not weigh on asset prices over the subsequent 12 months.
BlackRock identified three drivers behind the Fed's decision: persistent inflation, upward pressure from energy prices and labor market strength. These factors give the central bank operational space to tighten without triggering immediate concerns about economic or employment deterioration.
Market participants often view rate hikes negatively, reasoning that higher rates elevate corporate financing costs and suppress equity valuations while bond prices fall as yields rise. Yet BlackRock's review of seven Fed tightening cycles dating to 1983 tells a different story. In the 12 months after the initial hike in each cycle, U.S. stocks posted an average gain of 4.7 percent.
U.S. bonds performed similarly. Across the same seven cycles, investment-grade bonds averaged a 3.07 percent gain in the year following the first rate hike, while high-yield bonds rose 4.68 percent on average.
BlackRock argues the Fed typically raises rates during periods of relative economic strength, when growing corporate profits and stable employment can offset the drag from higher borrowing costs. A rate hike alone does not determine asset direction over the following year.
For fixed-income investors, BlackRock notes that current higher yields on low-risk securities and real yields offer an attractive entry point. While rising rates depress prices of existing bonds, new issuance provides potential for income and capital appreciation alongside diversification.
Kristy Akullian, Head of Investment Strategy for BlackRock Americas iShares, said in a recent report that as long as economic growth remains solid and rate movements stay manageable, investment opportunities persist. BlackRock, which manages $15.34 trillion in assets, maintains a bullish stance on U.S. stocks despite elevated borrowing costs and the prospect of further Fed action.
