NEW YORK (Reuters) - Pending leadership changes at the U.S. Federal Reserve are not worrying to Larry Fink, who runs BlackRock Inc (BLK.N), the world’s largest asset management company, although he does fret about what the Fed is doing to the U.S. Treasury yield curve.
Fink described President Donald Trump’s recent selection of Federal Reserve Governor Jerome Powell as the next head of the U.S. central bank to succeed current Chair Janet Yellen as a “safe and wise” choice.
“I’m not concerned about the transition,” he told the Reuters Global Investment 2018 Outlook Summit in New York.
He is equally sanguine about a change at the top of the most important of the Fed’s 12 regional banks, the New York Fed, with which Wall Street’s biggest banks and asset managers like BlackRock deal on a daily basis. There, William Dudley announced last week he will retire as president in mid-2018, about a year earlier than most had expected.
“Filling the New York Fed job will be quite easy,” Fink said.
While Fink declined to name a favorite candidate for the job, he said Peter Fisher, a former BlackRock executive who has worked at the Fed and the Treasury Department, would be a very qualified candidate.
“Peter seems like a reasonable choice,” Fink said of Fisher, a Harvard-trained lawyer who is now a senior lecturer at the Tuck School of Business at Dartmouth College.
Other potential successors to Dudley include Simon Potter, the current head of market operations at the New York Fed; Lorie Logan, the bank’s head of analysis and monitoring of market operations; and Brian Sack, who held the role before Potter and is now at hedge fund D.E. Shaw, market sources said.
His confidence in Fed leadership aside, Fink voiced concern about worrying signals from the U.S. Treasury market, where short-term yields are rising, driven by Fed rate hikes, but long-term yields are not because inflation pressures are largely absent.
This yield curve “flattening” is typically associated with slowing economic growth, and an outright yield curve inversion - in which short-term yields are higher than long-term ones - is often a precursor to recession. The spread between 2- and 10-year Treasury yields has narrowed from 135 basis points last December to around 71 basis points now, and it recently touched its tightest in a decade.
(For a graphic on 'U.S. Yield Curve - An Economic Omen?' click reut.rs/2zVhQyJ)
The Fed has raised rates by 1 percentage point over the last two years, and Fink sees another quarter-percentage-point rate hike from the Fed next month as essentially a done deal. Whether they deliver three more hikes next year as policy makers currently predict is another question, he said.
“I think they’ll be data-dependent, like they are every time,” Fink said. “They’re going to tighten in December, pause, wait and see, and if they don’t see any obstacles in the marketplace to their path, they’ll do it again in March.”
But should the Fed drive the yield curve into inversion, that would spell trouble for stocks.
“If we were to see a flat to an inverted yield curve, that would be a cause for equity pullback,” Fink said.
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Reporting by Svea Herbst-Bayliss and Richard Leong with additional reporting by Jonathan Spicer; Editing by Dan Burns and Lisa Shumaker