BlackRock's Rieder says the Fed could begin tapering bond purchases in November

Published Wed, Jul 28 202111:43 AM EDTUpdated Wed, Jul 28 202112:41 PM EDT

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

BlackRock's Rick Rieder said there's too much liquidity in global markets and the Federal Reserve should begin tapering its bond purchases soon. Rieder, chief investment officer of global fixed income, said he expects the central bank to detail its plans to pare back its $120 billion in Treasury and mortgage purchases in September. He expects the Fed will acknowledge after its meeting Wednesday that it has been discussing winding down its $120 billion monthly bond purchases. "I think we'll get a general discussion. We'll get communication that they discussed it," he said. The Fed will release a statement at 2 p.m. ET, and Fed Chairman Jerome Powell will brief the media at 2:30 p.m. ET. "My guess is the taper could take 10 months to execute, and I think they're going to start this year. I think they should start it for sure," Rieder said. Timing around tapering Some Fed watchers expect the central bank to begin slowing the monthly quantitative easing purchases early next year. But Rieder said he expects them to begin the process by December, with an "an outside chance they could start in November." The move by the Fed to taper its quantitative easing program is being watched closely by investors, since it is the first big move away from the extraordinary policies the central bank put in place due to the Covid pandemic. After the Fed ends the bond program, the door would be open for it to raise interest rates. "Part of the idea why taper is the right thing to do is the amount of liquidity, not just domestic liquidity, but global liquidity coming in from Asia," Rieder said. "Demand coming in from Asia, from life insurers and pension funds is pretty incredible." The Fed and other central banks are contributing to the flood of liquidity. "There's too much liquidity in the system today. ... China's moving more to an easier stance. The rest of the world is swimming in liquidity," Rieder said. "This is part of why the Fed could pull back. ... The demand for quality assets is higher than anything I've seen in my career by far." Higher demand, lower yields The strong demand for assets has helped drive U.S. Treasury yields lower. The Fed is buying $80 billion a month in Treasurys. The benchmark 10-year was at 1.25% on Wednesday, well off its high of about 1.75% from earlier this year. Bond yields move opposite price. Rieder and other strategists had expected the 10-year yield to reach 2% this year, but now he expects the high to be around 1.75% Yields have moved sharply lower instead of rising, as many expected. The 10-year reached a recent low of 1.12% . "I think you're going to end the year with rates higher than they are today," he said. "I think rates will be higher, but I think the range is going to be established lower. I think some of the Covid dynamics have definitely contributed to that. ... I think 1.5% to 1.75% is the right level with some of these recent moves." Inflation takes Rieder said the economy is beginning to level off, not from demand but from supply shortages. "It's going to extend economic growth into next year," he said. "The Fed can be more confident that hiring and growth can continue for a long time." The Fed has said inflation is transient. Rieder said that appears to be true, but some inflation could be more lasting. He expects the measured inflation rate at this time next year to be 2% or slightly higher. "But the risks are to the top side," he said. "The reopening dynamic is real, so when the Fed said most of this is transitory, it is true," he said. "However, when you look at the service level inflation and you look at wage dynamics, it's going to be stickier." Rieder looked at wage growth over two years, and noted that service worker hourly wages have jumped 10% since 2019, while average hourly wages for goods producing workers rose 7% in the same period. "We think the economy is going to be strong and the companies are finding generally the ability to pass it through," he said. Companies facing rising costs have been discussing how they can pass along these expenses to customers through higher prices.

Rick Rieder

Anjali Sundaram | CNBC

BlackRock's Rick Rieder said there's too much liquidity in global markets and the Federal Reserve should begin tapering its bond purchases soon.