BlackRock downgrades US stocks as the world's largest asset manager sees growing risk that the Fed's rate hikes will trigger a recession

The Federal Reserve is stuck between a rock and a hard place as it tries to balance raising interest rates with high inflation and the risk of an economic recession.

The difficult position the Fed finds itself in spurred the world's largest asset manager to reduce US stocks to neutral on Monday.

The risk of rates staying in restrictive territory has been raised by the Fed. The year-to-date selloff partly reflects this, yet we don't see a clear catalyst for a rebound. Runaway inflation occurs if they don't tighten enough. It is difficult to see a perfect outcome.

The Fed will do whatever it takes to stop the rise in inflation, as he still sees a strong labor market and resilient consumer as surviving a series of rate hikes.

The Fed is expected to raise the Fed Funds Rate by 50 basis points at both of its meetings this summer. The Fed raised interest rates by 50 basis points earlier this month for the first time since 2000.

It will be harder for central banks to cut interest rates and buy assets like they have done in the past because of the rapid pace of rate hikes by the Fed.

High commodity prices due to the Russia-Ukraine conflict and the recent COVID-induced slowdown in China are compounding the poor setup for equities with the Fed's monetary tightening plans.

We think China's economic outlook is going to be a drag on global growth, and we think the consensus forecasts for China's GDP growth are going to be revised down.

If the Fed makes a dovish pivot, it will cause BlackRock to reverse its view on equities and put it back into an overweight position on US stocks.

Tom Lee of Fundstrat believes that a recent increase in layoffs and a decrease in new job postings could help tame wage inflation, which is a core driver of overall inflation readings.