The Fed will eventually choose propping up growth over fighting inflation and will start cutting rates next year, says BlackRock

• The Federal Reserve will eventually favor propping up growth over fighting inflation, BlackRock said in a note Monday.
• That means the central bank will cut rates next year after overtightening, analysts predicted.

The Federal Reserve will have to pivot from its tightening policy and begin cutting interest rates in 2023, analysts from BlackRock said.

In a report Monday, the asset manager said a so-called soft landing, where the central bank raises rates without sinking growth, will be unlikely, as investors brace themselves for another 75-basis-point rate hike on Wednesday.

Rising interest rates have the effect of slowing down demand, which can help cool off the economy. But today's inflation regime stems from the supply-side of the economy, such as supply-chain issues and labor shortages, rather than the demand-side, analysts said.

"The ECB and Fed will eventually choose growth over inflation, we believe," BlackRock said. "That means they won't have slammed demand all the way down to meet the low level of productive capacity."

The ECB issued a hefty half-percentage point rate hike in July, and BlackRock sees it pivoting even earlier than the Fed with a change of course coming later this year as Europe slips into recession.

"What's our bottom line? We expect more volatility, so we focus on nimble, tactical positioning," BlackRock said. "We are underweight developed market equities on a tactical horizon because central banks appear set to overtighten policy. We are ready to switch back to overweight once central banks pivot to a more moderate rate path."