BlackRock's Rick Rieder says the Fed should send signal that it will step back from easy policies

Published Mon, Jun 14 20213:14 PM EDTUpdated Tue, Jun 15 20212:17 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

BlackRock's global bond chief, Rick Rieder, says the time has come for the Federal Reserve to step back from its easy policies and start talking about tapering its bond purchases. The market has been waiting for the Fed to officially announce an end to the program. Once it does, it is expected to start trimming purchases slowly within several months. Rieder expects the Fed this week to give the market an early warning that the taper talk is coming and then sometime later, perhaps late August, it will provide details of how and when it will end the program. He expects the Fed to start reducing its purchases by $20 billion a month after that. "I think they start towards the end of the year," he said of the tapering. Rieder said the market would be disappointed if the Fed doesn't say something this week about winding down the program, since it's been discussed by individual Fed officials. In an interview, Rieder also discussed how he expects the Fed to move earlier than forecast to raise interest rates. Rieder said Fed Chairman Jerome Powell is likely to signal the eventual bond-buying reduction after the Fed's two-day meeting Wednesday at his press conference. The Fed initiated the $120 billion a month in Treasury and mortgage purchases during the pandemic to provide liquidity to markets and keep interest rates low. But he said Powell will just give preliminary guidance and perhaps discuss that a more concrete plan is coming. "I think it's likely they lay it out at Jackson Hole, but there's no reason a plan couldn't come out earlier," he said. The Fed holds its annual symposium in Jackson Hole, Wyoming, at the end of August, and many Fed watchers have expected the Fed to talk about the tapering of its bond purchases there. Rieder said Powell will begin to set the stage for that announcement this week. Rieder said it's the perfect time for the Fed to act because there's too much liquidity in the system and there's a risk of overheating. "There is this persistent grinding of money that flows into not just the Treasury market but credit markets, securitization markets. There's just too much liquidity in the system. Not just in the U.S. but globally," he said. "There's never been a better time to reduce the size of the Fed's purchasing. For where the economy is today, they're not consistent with it." The Fed also releases economic forecasts and its projections for interest rates at the end of its meeting Wednesday. Rieder said he doesn't know whether the Fed will change its forecast for interest rates when it releases its so-called dot plot Wednesday. Some Fed watchers expect the forecasts of Fed officials will change, and that will bring forward their forecast for a first interest rate hike to 2023. Fed officials currently have forecasts through 2023, but they have no rate hike penciled in so far. Many market pros assume the Fed would forecast that it would raise rates in 2024. "There's a big debate about whether it's in 2023 or 2024," he said. "My sense is the markets will focus a lot on it, and I'm not sure it should be that significant an influence." He said it's more likely the Fed moves even sooner to raise its fed funds target rate range from zero. "I think at the end of the day, they will raise rates sooner. I still think it could come at the end of 2022 or the beginning of 2023," Rieder said. Unless the Fed makes a big change, tweaks to the interest rate forecast are not a big deal, he said. "If the market moves a lot on the delta between if it's 2023 or 2024, we would certainly go against it," he said. Liquidity has been a factor driving down the yield on the benchmark 10-year Treasury, which touched below 1.43% last week for the first time since early March. The yield was at 1.48% Monday. The 10-year yield has moved to surprisingly low levels after racing to 1.75% in late March. Yields move opposite price, and there has been strong buying by pensions and foreign institutions. Rieder said the yield should move higher after more of the fiscal stimulus money moves from the Treasury General Account, which is basically the Treasury's checking account. Rieder said the account will be down to $450 billion in July from its current $633 billion, as the Treasury pays out stimulus funds. The account has been reduced by about $190 billion since May. "It is one of the largest influences in the market right now. We see it every day ... when you see corporate bond auctions. We see it in securitizations," he said. "There's just this tremendous amount of money coursing its way through the system, and that's been a big driver in the system." Rieder said the huge liquidity is being pushed up the yield curve, meaning institutions and money markets that invest in short-term paper are moving funds to short-duration securities. He said the reduction in the Treasury General Account should work its way through the system and take some of the pressure off the 10-year yield after July. He expects it to move to the high 1% level this year. Correction: This article has been updated to reflect that Rick Rieder said he thinks the Fed will raise rates "at the end of 2022 or the beginning of 2023."

Rick Rieder

Katie Kramer | CNBC

BlackRock's global bond chief, Rick Rieder, says the time has come for the Federal Reserve to step back from its easy policies and start talking about tapering its bond purchases.

The market has been waiting for the Fed to officially announce an end to the program. Once it does, it is expected to start trimming purchases slowly within several months.

Rieder expects the Fed this week to give the market an early warning that the taper talk is coming and then sometime later, perhaps late August, it will provide details of how and when it will end the program. He expects the Fed to start reducing its purchases by $20 billion a month after that.