Blackstone's chairman warns that the market is exaggerating the possibility of a Fed rate cut

The head of Blackstone, the world’s largest alternative asset manager, has warned that investors are speculating on how quickly the US Federal Reserve will cut rates.

Blackstone president, Jonathan Gray, said that, while the Fed would likely shy away from further raising rates due to cooling inflation, financial markets have passed the odds that the central bank will lower borrowing costs.

“The Fed is likely to pause or maybe hike 25 basis points from here, but I think they are unlikely to pivot as quickly as the market is expecting,” he told the Financial Times in an interview.

He said the Fed would “keep rates high for an extended period of time” to eliminate remaining inflationary pressures.

Gray, who was speaking as Blackstone reported its first-quarter earnings on Thursday, is the latest senior Wall Street executive to warn investors to expect rates to remain high.

JPMorgan boss Jamie Dimon and BlackRock’s Larry Fink both argued last week that the collapse of a Silicon Valley bank and a wider conflict among regional US banks won’t be enough to keep the Fed from keeping rates high.

Investors still expect a final quarterly point rate hike in May or June, but for the Fed to begin lowering rates with forecasts of two cuts by the end of the year.

“I think inflation is definitely cooling off. It’s increasingly in the rear-view mirror and we see it across our portfolio companies,” Gray said. US inflation fell to its lowest level in nearly two years, with the consumer price index for March rising 5 percent year over year.

Gray warned that higher rates could create additional problems in the banking industry as savers reduce deposits at some lenders.

But he said he was not worried about a systemic collapse: “It is possible we could see further events, but I don’t think there is a systemic problem because we don’t have a systemic debt problem”.

Blackstone was speaking after the flagship group reported that its profits fell sharply in the first quarter and its fundraising slowed as investors grappled with the health of the commercial property market and fears of a slowdown in deal-making activity.

Blackstone attracted $40 billion in new investor capital in the first quarter, a decline of more than 5 percent from the previous quarter, as investors made fewer new commitments to the group’s real estate and private equity funds.

The downturn left Blackstone with $991bn in assets under management, slightly less than the $1tn in asset milestone its executives had already hoped to achieve, marking a new high-water mark in the private equity industry Was.

Those plans were thwarted by a negative turn in the financial markets, which caused investors to pull money from two fast-growing funds Blackstone had created for wealthy individual investors, reducing its growth and profits.

Fundraising challenges, combined with markdowns at some of Blackstone’s largest real estate funds, have caused the New York-based conglomerate’s fee revenue and profits to decline sharply from this time last year.

Blackstone’s fee-related earnings, which are a proxy for base management fees, were $1 billion, down 9 percent from this time a year ago, while its distributable earnings — a metric used by analysts as a proxy for overall cash Preferred as proxy. Inflows – fell 36 percent to $1.25 billion. Fee revenue slightly missed analysts’ estimates polled by Bloomberg, while profit slightly exceeded expectations.

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The group raised the bulk of its capital for credit and insurance-based investments, two new businesses it created after it became a giant in buyout and real estate investment.

Rising rates have increased the appeal of Blackstone’s credit funds, which invest in floating rate loans that benefit from higher borrowing costs. But the sudden increase in rates has spooked the firm’s $70 billion asset fund, Blackstone Real Estate Income Trust, which has been plagued by huge redemption requests since last November. This has caused the fund to fulfill only a fraction of the monthly and quarterly withdrawal requests Blackstone receives.

The sanctions highlight the shockwaves felt across Wall Street as central banks exit an era of ultra-low interest rates that rippled through the US banking system during the Silicon Valley bank collapse.