NEW YORK (Reuters) – The U.S. Federal Reserve should stop buying bonds from the market now to contain rampant inflation, a top investment manager at BlackRock said in a research note on Thursday, after higher-than-anticipated January inflation data.
U.S. consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, fueling market expectations that the Fed may increase rates more aggressively than anticipated to cool the economy.
As it seeks to contain inflation, the U.S. central bank also plans to reduce its nearly $9 trillion balance sheet, which grew in size during the COVID-19 pandemic as the Fed bought bonds in the market to support the economy.
After the pandemic-triggered recession, the Fed was buying $120 billion in Treasuries and mortgage-backed securities each month. While it has reduced that amount, it is still making purchases. At the latest meeting, the Fed said that beginning February it would increase holdings of Treasury securities by at least $20 billion a month and mortgage backed securities by at least $10 billion a month, and would bring those purchases to an end in early March.
“The Fed is still infusing the system with QE through the middle part of March”, said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, referring to quantitative easing – the Fed’s bond-buying programme.
“The Fed needs to react and address today’s high levels of inflation and end QE now,” Rieder said in a note.
While the Fed’s response to the pandemic has been “heroic”, Rieder said, it was now time to move swiftly to a neutral policy stance, avoiding at the same time a too restrictive tightening of monetary policies.
“We think policy needs to adjust quickly, but not necessarily too much in total amount as the Fed weighs data over time, since this would create significant risk for markets and the economy”, he said.
(Reporting by Davide Barbuscia; Editing by Alistair Bell)
