BlackRock’s Rick Rieder said it’s not clear whether there are any additional shoes to drop in the banking system, but he does see some tightening of lending and that could hurt the economy. “When you move the funds rate up as much as it has, and the banks are competing deposit-wise with Treasury bills at very elevated rates, and have some sticky assets that don’t adjust that quickly, it’s a difficult stress on the system,” said Rieder, in a phone interview. “My sense is there’s still some volatility that’s going to play through the financial system.” Rieder expects the Federal Reserve to raise interest rates by a quarter point Wednesday, but not continue raising as much as it would have before trouble surfaced at regional banks. “I think we probably took 50 basis points off of interest rates in the past week and a half in terms of where they will go, in terms of where the 10-year [Treasury] will go,” said Rieder, chief investment officer for global fixed income. “You’ve got clearly some additional economic contraction coming from a banking system that is going to pull back on some lending.” Separately, in an interview on CNBC’s ” Power Lunch, ” Rieder also said the state of the regional banking industry will be more clear over the next few weeks. Regional banks have been under pressure since the failures of Silicon Valley bank and Signature Bank, but the sector experienced a boost on Tuesday after Treasury Secretary Janet Yellen said the government could backstop the deposits at more banks in the event of contagion risk. “You have to assume the banking system is going to at least marginally going to pull back as they try to interpret how is their bank going to be regulated… how much capital are they going to have to run going forward,” Rieder said on CNBC. “All of those are big questions that we are going to learn over the next few weeks. He said he now expects the Federal Reserve’s terminal rate, or end point for rate hikes will be 5.25% to 5.5%, whereas it would have been at least 5.5% to 6% before the Silicon Valley Bank failure. He also expects that problems in regional banks have constricted some lending and took about a half percentage point off of gross domestic product. Not the time to get out of the markets As for markets, Rieder said investors can get decent returns in fixed income, but he still does not favor stocks, which he sees gaining about 8% this year. Rieder also heads the BlackRock Global Allocation team. He also runs the BlackRock Strategic Income Opportunities Portfolio (BSIIX) and the BlackRock Total Return Fund (MAHQX) . Rieder was recognized as an “Outstanding Portfolio Manager” by Morningstar on Tuesday. “Quality fixed income will do its job,” he said in the telephone interview. He said now is not the time to get out of the markets. Investors can hold more cash but build a portfolio of investment grade corporates, mortgages and other investments, he said. “We’ve been buying some quality investment grade product very recently. I think spreads got too tight and I think the market was a little overzealous in all assets,” Rieder said. “Some of these high-quality fixed income assets went through a period where it wasn’t very interesting, and now there’s some value again, particularly the front end of the investment grade market.” He expects the range of the benchmark 10-year Treasury yield will now also be lower, between 3.25% and 4%. Prior to the failure of Silicon Valley and Signature Bank, Rieder had anticipated the yield would range between 3.50% and 4.25%. The 10-year is closely watched since it influences mortgages and other lending rates. The note was yielding roughly 3.6% late Tuesday. US10Y 1Y line treasury The Fed’s balance sheet going forward Rieder said he believes he is calmer about the situation than some other investors. “This was certainly a sweaty palms few days, and my guess is I think you’ll probably get a bit more of that,” he said. As for the central bank, he said it will be important to see how the Fed discusses its role in stabilizing the financial system. “I think there’s something really important. The Fed’s balance sheet has grown a lot… part of why I think the Fed’s going to go 25 is I think they want to use rates as a way to tame inflation,” he said. “And I think they want to use liquidity and funding ability to make sure the system is liquid, fluid, and there’s no run on banks out there that they can’t solve through liquidity. So I think that’s a really, really big differentiation. That balance sheet has grown $300 billion since March 1.” He expects the Fed will let the balance sheet grow and keep it larger for awhile. The central bank had been reducing the size of its balance sheet by allowing maturing securities to roll off without replacing them. “As a percent of GDP, it’s not that scary a number,” he said of the balance sheet. “If the system seizes up, which we got a whiff of last week or so, that becomes really difficult for financial transmission and then lending.” That would affect the economy. The market has been pricing in about a full percentage point of rate cuts for this year. Rieder said it is more likely a rate cut would come in 2024, when he expects there could be a recession but not a deep one. Rieder expects the Fed will raise rates by a quarter point and could hike again by another 25 basis points before stopping. “These are pretty restrictive rates, and they were restrictive rates 100 basis points ago,” he said. A basis point equals one one-hundredth of a percentage point. Rieder said the central banks do not need to move rates as much as some people think. “I just don’t understand this view… I don’t think the central bank needs to do as much in interest rates as many say,” he said. “People say you can just keep moving the funds rate up, and move it up and move it up and it doesn’t create any stress, and it’s just wrong. We just watched it play out.” Rieder said now markets are anticipating a hike and then rate cuts later this year. But he said the Fed probably wants to get rates to a level and stop, not cut. “I think the market’s gotten overzealous on Fed easing,” he said.