The Federal Reserve’s aggressive interest rate hiking cycle has defined the US economic landscape for the past two years. Now, as inflation shows signs of moderating, a critical question emerges: when and how far can interest rates realistically come down? Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income and head of the firm’s Global Allocation Investment Team, offers a compelling case for gradual easing. Pointing to structural shifts in the economy, evolving inflation dynamics, and the burgeoning impact of technology, Rieder argues that the Fed has room to lower rates, even amidst ongoing economic resilience. Understanding this potential pivot is crucial for investors navigating the fintech and broader economy sectors.
1. The Service-Driven Economy & Its Resilience Amidst High Rates
The modern US economy is fundamentally different from past industrial eras. As Rieder emphasizes, it’s now overwhelmingly dominated by services rather than goods manufacturing or heavy industry. This structural shift has profound implications. Service-oriented businesses have demonstrated remarkable agility in adapting to higher borrowing costs, often through efficiency gains and pricing power, allowing many to maintain or even grow profits despite the Fed’s tightening.
This resilience is evident in persistent corporate earnings strength and a robust labor market, factors that have supported equity markets. However, Rieder suggests this adaptability also means the economy might not require current restrictive interest rates for as long as some anticipate to cool inflation. The inherent flexibility of the service sector provides the Fed with potential leeway to begin normalizing policy without triggering a sharp downturn.
- Key Insight: “Companies have adapted incredibly well… they’re making more money than they were before,” Rieder notes, highlighting the service sector’s unique ability to weather higher rates.
- Source: U.S. Bureau of Economic Analysis (BEA) data consistently shows services accounting for over 77% of GDP output and private-sector employment (BEA GDP by Industry).
2. Disinflation Trends & The Case for Modest Rate Cuts
While acknowledging inflation remains above the Fed’s 2% target, Rieder points to a significant cooling trend. He estimates current underlying inflation (core PCE) runs between 2.5% and 2.75%. Critically, he argues that even if the Fed lowers the policy rate to, say, 3.25%, interest rates would still be restrictive relative to inflation (i.e., positive real rates).
High rates disproportionately burden lower-income borrowers reliant on credit (auto loans, credit cards) and exacerbate housing affordability crises by keeping mortgage rates elevated. Rieder contends that carefully calibrated cuts can alleviate these pressures without reigniting inflation, given the progress already made. This is not about stimulating a weak economy, but rather adjusting policy to a more neutral stance as inflation sustainably retreats.
- Key Insight: “You can bring rates down… and still be restrictive,” Rieder states, underscoring that moderate cuts wouldn’t equate to loose policy.
- Source: Federal Reserve’s preferred inflation gauge, Core PCE, showed a 2.6% year-over-year increase in May 2024, down significantly from peaks (Federal Reserve Economic Data – FRED).
3. Debt Dynamics & The Imperative for Sustainable Financing
The sheer scale of US government debt cannot be ignored in the interest rates discussion. Rieder stresses that managing this debt burden requires nominal GDP growth (real growth + inflation) to consistently outpace the growth rate of the debt itself. He projects nominal GDP growth in the 4.5%-5% range.
Sustaining high policy rates makes financing this massive debt increasingly expensive and potentially destabilizing. Rieder highlights a crucial shift: a growing share of Treasury issuance is being absorbed domestically (by banks, money market funds, households), reducing reliance on foreign buyers. This domestic financing base, while helpful, still necessitates a manageable interest rate environment to prevent debt service costs from spiraling.
- Key Insight: “You have to grow faster than the debt… to bring the debt burden down,” Rieder emphasizes, linking fiscal health to sustainable rate levels.
- Source: Congressional Budget Office (CBO) projections consistently show rising debt-to-GDP ratios and interest costs under current policy (CBO Budget & Economic Outlook).
4. The Tech & Productivity Surge: A Disinflationary Wildcard
Rieder reserves significant optimism for the transformative impact of technologies like Artificial Intelligence (AI), robotics, and automation. He believes their adoption will drive a productivity boom far exceeding the gains seen during the internet era. Companies effectively leveraging data and these technologies will achieve unprecedented efficiency gains.
This surge in productivity is inherently disinflationary. It allows businesses to produce more goods and services with less input cost (labor, capital), easing inflationary pressures without requiring economic weakness. This technological acceleration provides the Fed with a powerful, positive reason to lower interest rates – not just reacting to economic pain, but enabling further productive investment. Rieder also notes the explosive growth in tech investment (“hyper-scalers,” semiconductors, software) and sees potential in strategically selected small-cap stocks (“barbell approach”).
- Key Insight: “The productivity that we’re going to get… is going to be much more significant than what we got in the internet era,” Rieder predicts, citing a major structural disinflationary force.
- Source: Studies on AI’s economic impact, like those from McKinsey Global Institute, project significant productivity boosts across sectors (McKinsey AI & Productivity).
5. Stablecoins: An Emerging Factor in Fixed Income Markets
Rieder touches upon the evolving role of crypto, specifically stablecoins. He sees them as potentially beneficial for the broader financial system, particularly by absorbing a portion of the demand for ultra-short-duration government securities like Treasury bills. As stablecoin adoption grows globally (despite crypto volatility), their reserve requirements could create a new, significant source of demand for high-quality liquid assets. This could subtly influence short-term funding markets and the yield curve.
- Key Insight: “Stablecoins… can be quite useful for the system,” Rieder suggests, noting their potential role in Treasury markets and payments.
Conclusion: A Gradual Descent Anchored in Structural Shifts
The path to lower interest rates, according to Rick Rieder, is being paved by powerful structural forces: the adaptability of the service-based US economy, the clear (though incomplete) downward trajectory of inflation, the imperative of managing a massive debt burden sustainably, and the profound disinflationary potential of the AI-driven productivity revolution. This confluence suggests the Fed can, and likely will, begin a gradual easing cycle in the coming months, even without a dramatic economic slowdown.
Rieder’s Actionable Insight: “I think you can bring rates down… I think you can bring them down meaningfully and still be restrictive.” He advocates for a measured approach, focusing on the front end of the yield curve initially, as the long end faces challenges from persistent inflation expectations and significant Treasury supply. For investors, this underscores the potential value in short-to-intermediate duration fixed income and sectors poised to benefit from the productivity boom.
Expert Quote (Conclusion): “The economy is very different… It’s a service economy,” Rieder reiterates. “And I think we have the ability to bring rates down… The Fed has optionality here.”
People Also Asked
Q: What is today’s interest rate (Fed Funds Rate)?
A: As of late July 2025, the target range for the Federal Funds Interest Rate set by the Fed is 4.50%. This is the benchmark short-term interest rate influencing borrowing costs across the US economy. The Fed adjusts this rate based on its inflation and employment goals. Check the Federal Reserve’s official statements for the latest updates (Federal Reserve FOMC).
Q: Is 7% a high interest rate?
A: Context is crucial. Historically, 7% for a 30-year mortgage was common decades ago. However, compared to the ultra-low rates (2-3%) seen post-2008 Financial Crisis and even pre-2022 hikes (3-4%), 7% is considered high today. It significantly impacts affordability, especially for housing and large purchases. Whether it’s “high” long-term depends on inflation; if inflation stabilizes around 2%, 7% nominal rates imply very high real rates.
Q: Why does BlackRock think rates can fall?
A: BlackRock’s Rick Rieder bases his view on several factors: 1) Underlying inflation cooling to ~2.5-2.75%, 2) The service-based economy’s resilience meaning less need for highly restrictive policy, 3) The unsustainable cost of high rates on massive government debt, and 4) A coming surge in productivity (driven by AI/tech) that will naturally dampen inflation. He believes the Fed can cut rates modestly while still maintaining restrictive policy.
Q: How do interest rates affect the fintech sector?
A: Interest rates profoundly impact fintech. Higher rates: 1) Increase borrowing costs for fintechs relying on debt, 2) Make profitable lending harder (higher cost of funds vs. loan yields), 3) Reduce venture capital availability (higher discount rates lower valuations), and 4) Can shift consumer behavior away from credit products. Conversely, falling rates can ease these pressures, boost lending margins, and improve access to capital, potentially accelerating growth for well-positioned fintech firms.
