It's a misconception that the Fed will soon make a dovish pivot and investors should brace for more volatility, BlackRock says

It's wrong to assume the inflation fight is over, BlackRock said, warning investors to brace themselves for a "market rollercoaster."

• BlackRock says it isn't expecting a dovish pivot from the Fed in the near term. 
• A rally in stocks suggests investors anticipate a slowdown in monetary policy tightening. 
• BlackRock said investors are strapped in for a "market rollercoaster" in the coming months.

Investors are showing some optimism that policy conditions could ease after the Federal Reserve issued another 75 basis point rate hike last week, but it's wrong to assume the central bank will soon turn dovish, BlackRock said, warning investors to brace themselves for a "market rollercoaster."

The comments followed July's stock market gains of a 12%, marking the best month since November 2020. 

But while some have bought into the idea that the Fed has tamed inflation with this year's rate hikes, and will soon stop tightening its policy, BlackRock thinks that bullishness is premature, and the central bank isn't going to turn dovish anytime soon. 

"Markets have rallied on hopes the Fed is about to change course and relax policy. That optimism is misplaced, in our view," the investment bank said in a note on Monday.

Analysts said they do not expect a rate cut until 2023, and inflation is showing signs of being sticky through the end of the year. Prices hit a 41-year high of 9.1% in June's Consumer Price Index reading, and analysts from Bank of America have suggested it will take a while for it to come down closer to the Fed's 2% target. 

Yet, Fed Chair Jerome Powell said at a press conference last week that he believed the interest rate had reached neutral levels, a level where monetary policy wasn't restrictive or expansionary – another way of saying the central banker believed the bulk of its inflation fight was over.

BlackRock's analysts are less optimistic.

"The Fed still thinks hiking rates will only cause a mild slowdown. It has yet to acknowledge the stark growth-inflation tradeoff," analysts said, referring to the possibility that the central bank may hike up rates too fast and halt economic growth, or the possibility they would need to tolerate inflation to prevent a severe recession. 

If that's the case, monetary tightening won't come to an end for the time being – and the belief in a soon-to-come economic expansion could set up investors for even more market volatility.  

They added investors may also be tripped up by behavioral biases that appear in volatile markets, such as being unwilling to make changes to a portfolio, making too small changes too slow, or holding onto losing stocks for too long.

"The era of steady growth and inflation known as the Great Moderation is over, we believe," analysts warned. "A new regime of increased macro volatility is in its place."