BlackRock CEO predicts that “inflation will be closer to 3.5% or 4% for the next few years”

“I believe that inflation will persist and it will be harder for central bankers to tame. I believe inflation is more likely to be closer to 3.5% or 4% in the coming years.” says the chairman and BlackRock CEO Larry Fink in the annual investor letter. This is just one of the messages that the president of the largest asset manager in the world sent to the market.

“The dramatic changes in financial markets are happening at the same time as other equally dramatic changes in the global economic landscape – all of which will keep inflation high for longer”, says the head of BlackRock. Larry Fink addresses the current financial context and says it is the result of years of “easy money”.

Since the 2008 financial crisis, “markets have been defined by extraordinarily aggressive fiscal and monetary policy. As a result of these policies, we have seen inflation rise sharply to levels not seen since the 1980s. To combat this inflation, the Federal Reserve last year raised rates by nearly 500 basis points. This is a price we are already paying for years of easy money – and it was the first domino to fall”, says the manager.

“Bond markets were down 15% last year, but it still looked, as they say in those old Western movies, ‘quiet, too quiet.’ Something else had to happen, and the fastest pace of rate hikes since the 1980s has exposed the fissures in the financial system,” says Fink.

Last week saw the biggest bank meltdown in over 15 years as regulators intervened at Silicon Valley Bank. “This was a classic case of a bank balance sheet in which there is a mismatch between assets and liabilities”, emphasizes the CEO of BlackRock.

“Two smaller banks also failed in the last week. It’s too early to know how far the damage will go. The regulatory response so far has been swift, and decisive action has helped to avoid contagion risks. But markets remain on a knife edge. Will asset-liability divorces be the second domino to fall?” asks Fink.

It should be recalled that, after a week of turbulence for the financial markets, on Thursday night some of the major North American banks joined efforts to rescue First Republic Bank with an injection of 30 billion dollars, after the institution registered a growing number of customers withdrawing money. The US bank had the third highest rate of deposits not secured by the Federal Deposit Insurance Corporation (FDIC) among US banks, after intervened Silicon Valley Bank (SVB) and Signature Bank.

“Bank of America, Citigroup, JPMorgan Chase and Wells Fargo have announced that they will each deposit $5 billion to First Republic Bank. Goldman Sachs and Morgan Stanley will each deposit $2.5 billion and BNY Mellon, PNC Bank, State Street, Truist and US Bank will each deposit $1 billion,” according to a statement. The intervention of the banks was concerted by the United States Government.

Larry Fink says in the letter to stakeholders that “we still don’t know if the fallout from easy money and regulatory changes will cascade across the entire US regional banking sector (similar to the Savings and Loans crisis of the 1980s) with more bailouts and bankruptcies of banks to arrive”.

“It seems inevitable that some banks will now need to reduce credit to strengthen their balance sheets, and we will likely see tighter capital requirements for banks,” argues Fink.

The CEO of BlackRock predicts that banks will resort more to the market to finance themselves. “In the longer term, the current banking crisis will make the role of capital markets more important. As banks potentially become more constrained in their lending portfolio, or as their customers wake up to these asset-liability discrepancies, I predict they are likely to turn to capital markets for funding in greater numbers.”

And, he adds, “I imagine that many people responsible for corporate treasuries are now thinking about withdrawing their bank deposits every night to reduce even overnight counterparty risk”.

“There may yet be a third domino to fall. In addition to the maturity discrepancies between assets and liabilities, we can now also see liquidity gaps. Years of low rates have had the effect of prompting some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns. Now there is a risk of liquidity mismatch for these investors, especially those with leveraged portfolios”, warns the CEO of BlackRock.

As inflation remains high, the Federal Reserve will remain focused on fighting inflation and will continue to raise key interest rates. Fink considers, however, that although the financial system is clearly stronger than in 2008, the monetary and fiscal tools available to monetary policymakers and regulators to deal with the current crisis are limited, especially with a divided government in the United States. .

Fink also recalls that with higher interest rates, governments are unable to maintain fiscal discipline and the low deficits of previous decades. The US government spent a record $213 billion on interest payments on its debt in the fourth quarter of 2022, $63 billion more than a year earlier.

The manager cited the example of the United Kingdom where “we have seen how markets react quickly when investors lose confidence in their government’s fiscal discipline”.

The president of BlackRock argues that “after years of global growth driven by high government spending and low interest rates, the world now needs the private sector to grow economies and raise the standard of living of people around the world. We need leaders, both in government and in business, to recognize this imperative and work together to unleash the potential of the private sector”.

While most of our peers saw net outflows in 2022, “clients trusted BlackRock to manage nearly $400 billion in long-term network new assets – including $230 billion in the US alone,” says the report. head of BlackRock.

“The year 2022 was one of the most challenging market environments in history – a year in which both equity and bond markets declined for the first time in decades – and the challenges continue into 2023,” he adds.

“I wrote in last year’s letter to shareholders about the profound changes in globalization in 2022 as a result of Russia’s invasion of Ukraine. But the seeds of a backlash against globalization were planted long before this war in Europe. In 2017, I highlighted how globalization and technological change were dividing communities and impacting workers. Social implications have included Brexit, unrest in the Middle East and political polarization in the US. The isolation resulting from the Covid 19 pandemic led to greater protectionism and polarization”, recalls the manager.

Polarization and fragmentation have eroded trust and diminished hope, he concludes.

Finally, Larry Fink warns that the world faces a “silent crisis” when it comes to retirement pensions. “When people are afraid, they may save, but they won’t invest unless they have confidence in the future. To help tackle the crisis, we need to understand what is driving financial decision-making in different markets,” he says.

It is necessary to know “how to help customers find opportunities in the global energy transition”, he added.