The U.S. Federal Reserve would help the economy by ending its bond buying program, according to a new Blackrock report.
“A reduction in the Fed's asset purchases is not Armageddon — it is actually healthy,” according to the firm's midyear outlook released Thursday, “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 might start phasing out the stimulus later this year if the economy grows in line with 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 its outlook.
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. Treasuries lost 3.35% as then-Fed Chairman Alan Greenspan surprised the market by doubling benchmark lending rates to 6% in 12 months.