Bulls, bears and BlackRock’s bond guru as the Fed goes hunting for a recovery

BlackRock’s Rick Rieder: By year end, BlackRock anticipates the Fed’s balance sheet will have grown by a staggering $US7 trillion in an effort to deal with the fallout of the coronavirus crisis. Picture: Hollie Adams

When Fed Chair Jay Powell famously said on 3 October 2018 “we’re a long way from neutral”, BlackRock’s CIO of global fixed income, Rick Rieder, simply tweeted “#fedpause”.

The rest is history as the Fed roiled markets with a final rate hike in December before abandoning its plan for further rate hikes altogether in early 2019.

The Fed started cutting rates in response to the economic downturn later that year, then cut rates to zero and adopted unlimited quantitative easing in response to the COVID-19 crisis this year.

More lately, BlackRock’s bond guru has been super impressed by the Fed, and the takeout is that it’s all very bullish for the US sharemarket.

Mr Rieder says the overarching theme of yesterday’s FOMC statement and press conference was that the Fed is “committed to doing ‘whatever it takes’ and more, just to make sure as strong as possible a recovery can be reestablished.”

His expectation is that the Fed will purchase roughly equivalent to at least $US1.5 trillion ($2.29 trillion) in Treasuries over the remainder of the year, or about $US200bn per month.

“With asset purchasing in roughly these amounts, as well as everything the Fed has already done, the magnitude of the policy response to this economic crisis is simply stunning,” Mr Rieder says.

For context, from the founding of the Federal Reserve at the end of 1913, until 2008, or roughly 95 years, the central bank’s balance sheet grew from essentially $US0 to $US900bn.

Yet in response to the Global Financial Crisis of 2008-09, from 2008 through 2014 (and encompassing QE1, QE2 and QE3), the Fed’s balance sheet grew four-fold, to nearly $US4.5 trillion, or at a pace of roughly $US3bn per day.

By year end, BlackRock anticipates the Fed’s balance sheet will have grown by a staggering $US7 trillion in an effort to deal with the fallout of the coronavirus crisis, or a pace of nearly $US26bn per day over a 270-day window.

To provide a sense of scale, Fed asset purchases through year-end will equate to nearly one third of US GDP, and the total Fed balance sheet at year end is likely to reside at more than 50 per cent the size of the US economy.

Looked at differently, Fed purchases through year-end will amount to nearly 28 per cent of the S&P 500 Index market capitalisation or will equate to nearly 20 per cent of the US Aggregate Bond Index.

“The policy response has been monumental and highlights the Fed’s determination to not lose this battle,” Mr Rieder says.