US withdrawal of QE: What the experts are saying…

19th December 2013


As the US economy gathers further strength, its central bank is now gearing up to start reducing its massive quantitative easing programme (QE) in January.

The US Federal Reserve will taper its $85bn-a-month bond buying strategy to $75bn in January and thereafter continue to lower the stimulus once the economic rebound stays on course.

The programme, which essentially boils down to pumping cash into the economy, was first instigated to bolster the US economic recovery in the wake of the financial crisis which erupted in 2008.

But recently economic activity and job numbers have been steadily improving. Data released in November showed that the US economy rose at a faster than anticipated annual rate of 2.8% between July and the end of September, up from 2.5% in the previous three months.

The move however has been cushioned by the Fed’s assertion that zero interest rates will remain in place for sometime yet and that QE could be pushed back up if need be.

We round up what the experts are saying:

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment

“The US economy is escaping from its debt trap and Fed tapering is just another sign of recovery. A disinflationary pick up in global growth is good for stocks and our multi asset funds have a large overweight position.

“However, the prospect of eventual interest rate rises makes us cautious on government bonds and interest rate sensitive sectors of the stock market like Consumer Staples, Utilities and Property. I’m not surprised Bernanke started the taper. He didn’t want to leave office with the tap running on full. However it ends, this way he can say he started the mopping up process.”

Rick Rieder, chief investment officer of fundamental fixed income at BlackRock

“We’re pleased with the Fed’s decision, having long argued that the last round of QE was too large and disrupted the proper functioning of financial markets without meaningfully helping the labour market. This is a step in the right direction. We think there is ample evidence that the labour market is strengthening, if slowly, which is why the Fed was able to make this decision today.

“At the same time, wage pressures aren’t there yet, helping to keep a lid on inflation even as some of the disinflationary factors we’ve seen in energy and technology are actually helping to lift productivity and growth. This is all good for the economy. BlackRock has been calling for U.S. growth of around 2.5% in 2014, but we could see an upside surprise on that number.

“This won’t be a big shock for bonds, because there’s still plenty of easy money in the global financial system. That’s not to say rates won’t move higher over time. We are looking for the 10-year U.S. Treasury to inch up to 3.25% or so by the middle of next year. So-called spread sectors – high yield, commercial mortgages and other asset-backed bonds as well as longer-dated municipal bonds – are all still better bets than Treasuries.”

Schroders chief economist, Keith Wade

This is about as dovish a taper as could be imagined. However, on the basis that the Fed trims $10bn at each subsequent meeting then asset purchases would be over by October next year. At his press conference Bernanke dutifully reminded us that such moves were data dependent and left the impression that the Fed still has doubts about the strength of the recovery and concerns over the low level of inflation.

“Inflation certainly is low, but it is a lagging indicator. There are already signs that wages are responding to the fall in unemployment and as the labour market tightens further, which leading indicators suggest it will, price pressures will pick up. Compared to the Fed’s projections we also see more upside risks to growth in 2014 as there is scope for a stronger consumer as employment and incomes rise and wealth effects continue to improve balance sheets and confidence. Those wealth effects got a little stronger as markets soared on the taper news.  The economy is approaching take off velocity in our view.

“Bernanke has every right to be cautious after the experience of the past few years, but there was an opportunity here to herald a turn in the economy and a new phase of growth. Instead of dispensing seasonal cheer he seems stuck in crisis mode.”

J.P. Morgan Asset Management fund manager Tony Lanning

“Markets have been dominated since May (when Bernanke made it clear the Feds intention to begin to taper asset purchases) by the timing of when tapering would begin to take effect. This early talk provoked a deleveraging across asset classes, in particular fixed income and currency markets.

“The decision to begin the tapering process in January (buying $5B less treasuries and $5B less MBS) was also accompanied (we think) more importantly by a decision to move expectations away from a 6.5% unemployment rates being the catalyst to the Fed raising interest rates. Following last night’s statement it seemed clear that zero interest rates will remain in place even when (if) unemployment falls below that level. They also highlighted their preference for inflation to move closer to their 2% target.

“We believe this should now allow the markets to begin to re focus on fundamentals which we feel continue to improve albeit slowly. The decision to begin to withdraw the medicine should give markets comfort that the patient is indeed recovering and that the economic recovery is real.”

Dan Harlow, deputy manager of the AXA Framlington American Growth fund 

“The recent extension of QE appeared at the time to be largely a function of the economic uncertainty created by political fights over the budget. Therefore, the recent reassuring Budget agreement coupled with the impressive economic data seen this month proved too great for the Fed to ignore any longer.

“Investors gave the move their resounding approval, with the S&P closing up 1.7% to close at a new all-time high. The Street was relieved that this was a relatively small cutback in monthly bond purchases, as well as by the commitment to maintain a pragmatic approach going forward. Importantly the tapering announcement included a pledge to maintain interest rates at their present level until “well past the time that unemployment declines below 6.5%”. Not only did this mark an extension in the amount of time it plans to wait before raising its target for short term rates (previously it was at the 6.5% level), but the clarity and strength of this commitment means we are unlikely to see rate increases until well into 2015.

“This move is another important step forward in the economic recovery and is in-line with our expectations. Importantly the vote of confidence the Fed has shown in the health of the US economy, along with the recent budget agreement, will only help improve both consumer and corporate confidence.”

Asoka Wöhrmann, co-CIO of Deutsche Asset & Wealth Management

“Based on our forecast of the economy strengthening in 2014, we expect the U.S. Federal Reserve Board (Fed) to scale back asset purchases further and probably end them by the second half of next year. The Fed will not begin raising rates until late 2015 at the earliest.

“We don’t see a huge move in US Treasuries prior to year end as markets have already discounted the effect of tapering on asset prices. The focus will now shift to the question of if the economy is indeed recovering at a faster pace. In this scenario rates should gradually move higher if further tapering is announced.

“The decision is modestly positive for Developed Markets equities. Since the economy is becoming more self-sustainable, corporate earnings are expected to grow. This will allow equity markets to re-focus again on improving corporate fundamentals. We do not expect that volatility in the Currency Markets will heighten that much. We expect a sustained revaluation of the US Dollar especially against the Yen and the British Pound.”

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