Fed Will Tell Market to Chill: Pimco Strategist
It is the market's anxious question: Will Ben Bernanke roll down bond purchase? For Pimco's Tony Crescenzi, the answer is clear: "No."
"What we expect from the Fed is for it to suppress volatility, and it can do it on a number of ways," the Pimco market strategist and portfolio manager said Tuesday on CNBC's "Futures Now." One of those ways is to "indicate that the $85-billion-a-month is staying," Crescenzi said.
Crescenzi sees the quashing of volatility as a major goal for Fed Chairman Bernanke. "What the Fed has attempted to do is suppress interest rate volatility, and push investors ever-outward along the interest rate spectrum," Crescenzi said. "You could call Bernanke 'Mr. Volatility Suppressor.'"
Crescenzi believes a Fed message that scares investors is one of the few things that could actually increase bond yields right now—because Fed action is not imminent.
"When bond investors believe that the Fed will be on hold for long periods of time and sitting on interest rates like an elephant on an ant, the bond investors don't look for that extra yield for the uncertainty that exists for the policy rate, because we're not expecting the policy rate to move," Crescenzi said.
So as important as maintaining the pace of asset purchases is, Crescenzi believes the Federal funds rate is even more important. "The more important anchor for interest rates is that Federal funds rate, which is at zero," he said. He expects the Fed to reassure the market that "there will be a considerable time between the end of asset purchases, and the first rate hike."
Beyond maintaining the pace of asset purchase, Crescenzi expects the Fed to take other steps to reduce bond volatility.
"The Fed will probably want to deliver a ho-hum policy statement on the economy," Crescenzi said. "If it downgrades the economy, it might create those risks again in assets, because people are piling in. If it upgrades the assessment, there will be rate fears."
Further, the Fed will likely look to clear up the market's idea of how easing will end. "The word 'taper' is a misnomer," Crescenzi said. "It's not tightening, and it's not a preordained path to zero."
So if the Fed won't roll down easing now, then when will it?
"The end of asset purchases probably won't be until sometime next year," Crescenzi said, "and the first rate hike won't be until 2015."