BlackRock Inc., the world’s largest asset manager, said the U.S. Federal Reserve would help the economy by ending its bond buying program.
“A reduction in the Fed’s asset purchases is not Armageddon, it is actually healthy,” the New York-based firm said today in a midyear outlook titled “Exit, Entry and Overshoot.” “Trillions of dollars of stimulus have failed to spur much credit growth and economic activity. Money market multipliers across the world have essentially collapsed.”
The Fed has been buying $85 billion of U.S. government debt and mortgage securities every month to put downward pressure on borrowing costs in the third round of its quantitative-easing strategy. The purchase programs, which began in 2008, have lifted the central bank’s assets to $3.5 trillion from less than $1 trillion five years ago. Chairman Ben S. Bernanke said last week that policymakers may start phasing out the stimulus later this year if the economy grows in line with their projections.
The job market appears better than it is because many workers have stopped looking for employment and the housing recovery is still fragile as first-time home buyers remain gun shy and have difficulty getting credit, BlackRock said in the presentation.
The nation’s jobless rate in May was 7.6 percent, according to government data, compared with the 11.5 percent it would have been had the labor participation rate stayed where it was before the 2008 financial crisis, BlackRock said.
The Fed has to start reducing bond purchases because it’s running out of securities to buy with the U.S. government issuing less debt, according to the report.
“An eventual halt in Fed bond buying does not necessarily equal a 1994-style bond market rout,” said BlackRock, which manages $3.94 trillion in assets. “Given a mild outlook for inflation, the Fed will likely err on the side of tapering slowly.”
In 1994, U.S. Treasurys lost 3.35 percent as then-Fed Chairman Alan Greenspan surprised the market by doubling benchmark lending rates to 6 percent in 12 months.
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