One of Wall Street's biggest money managers has called on the Federal Reserve to rein in its program of quantitative easing, saying its bond-buying tactics are a "large and dull hammer" that have distorted markets and risk stoking inflation.
Rick Rieder, who oversees $763 billion in fixed income investments for BlackRock, spoke out as the Fed debates how long to persist with the unorthodox measures it has used to stimulate the U.S. economy. His comments add BlackRock to the growing list of Fed critics who are warning of trouble ahead for the bond market.
BlackRock has been an advocate of government debt in recent years, in comparison to the shrill voices that delivered premature warnings of higher rates. Mr. Rieder's shift comes as the asset manager pushes clients towards investments with less sensitivity to the effect of higher interest rates than long-dated bonds.
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Mr. Rieder favors government debt that matures within five years, corporate and emerging market debt, and bank loans that offer floating interest rates.
"Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy," he told the Financial Times. "It is a very large and dull hammer for markets."
The Fed buys $85 billion of Treasurys and mortgage-backed securities every month, about two-thirds of the net issuance of such bonds.
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Mr. Rieder called for the Fed to cut its bond-buying to $40 billion-$45 billion a month, a level that would just maintain its stock of holdings by reinvesting debt as it matures.
In recent comments, both Fed chairman Ben Bernanke and New York Fed president William Dudley have endorsed a slowdown of purchases designed to suppress long-term interest rates once the economy has enough momentum.
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Mr. Rieder said the Fed had a window to cut back its bond-buying now. "The economy is on a reasonably strong footing," he said, even as unemployment remains at 7.6 percent. "The U.S. labor market faces an array of structural headwinds that are likely to only be overcome in time."
Those structural problems include: the costs of healthcare and pensions, which encourage the hiring of part-time workers; skill shortages – "people are not fit for the jobs available"; and demographics – "as the population ages, more and more people are staying in the workforce".
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Since the Fed has set a 6.5 percent unemployment target, Mr. Rieder said that given BlackRock's expectations for a slow fall in the jobless rate, a move in short-term interest rates was not likely until late 2015.
BlackRock estimates that interest rates on 10-year Treasurys are about 100 basis points below where they would be normally. Mr. Rieder said that as such interest rates normalize, "losses that occur to fixed-income portfolios will be more and more acute".
On Monday morning in New York the yield on ten-year Treasurys was 1.72 percent.