QUESTION OF THE WEEK

Will the Fed’s tapering hurt U.S. growth?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and our insights.  

    Markets are trying to navigate liquidity crosscurrents. There’s the prospect of $4.5 trillion in U.S. fiscal spending – at a time when the powerful restart of economic activity is already raising concerns of overheating the economy. Then there’s market angst about the Fed’s tapering its asset purchases this year. So, it’s about balancing an increase in fiscal liquidity with a decrease in monetary liquidity.

    Will the Fed’s tapering hurt the U.S. economy’s growth momentum in the short run?

    • No. Support not needed (16%) 
    • No. Fiscal boost to offset (43%)
    • Yes. Virus to hit growth (13%)
    • Yes. Market selloff hurts (28%)

    Source: Blackrock Investment Institute, with data from SurveyMonkey. Note: Data does not include results from BlackRock social media polls.

    Poll results 

    This recent Fed meeting minutes and Jackson Hole speech by the U.S. Fed chair revived the market debate around the central bank’s tapering of asset purchases. We asked and you answered: the majority of our public poll respondents (43%) voted that the Fed’s tapering would not hurt U.S. growth thanks to an offsetting fiscal boost.  

    Among BlackRock portfolio managers, the majority (67%) saw no hit to growth from a winding back of the Fed’s asset purchases, with most of the view that the economy is ready to function without support. But what about the long-term impact of the unprecedented fiscal and monetary stimulus, including the likely $4.5 trillion in fiscal spend ahead? Most (70%) are concerned, with more than a quarter anticipating that this unprecedented injection of liquidity will inevitably lead to overheating and excessive inflation.

    Tour de table

    A portfolio manager within the BlackRock Portfolio Management group said the economy can now function without support and sees U.S. consumption on a very firm footing, thanks to around $2.5 trillion of excess savings.  Another speaker thought there was no question that stimulus has spurred risk appetite, adding that tapering would unlikely be too detrimental as the economy looks robust.

    What about the impact on the fixed income market? Any reduction in Fed asset purchases would likely be offset by reduced U.S. Treasury issuance, one fixed income portfolio manager noted.

    Too low for too long? 

    Keeping ultra-accommodative monetary policy in place for much longer could erode durability of the rebound by distorting capital allocation, as well as risk creating asset bubbles and widening wealth disparity, some fixed income portfolio managers worry. Others agreed that in the longer term, negative real yields are a tax on savers and increase the potential for financial bubbles.

    Fed Chair Jerome Powell reassured markets at the recent Jackson Hole symposium, making no announcement on tapering but giving a strong signal that one will come before year-end if employment gains keep up. He also made clear that tapering “will not carry a direct signal” with respect to a lift-off in policy rates. The BlackRock Investment Institute expects the Fed to start normalizing policy rates in 2023, a much slower pace than market pricing for lift-off in 2022 indicates.

    For the past year, the BlackRock Investment Institute (BII) has been warning about underappreciated medium-term inflation risks and the fragile equilibrium of low interest rates amid surging debt. Learn more in the Macro and market perspectives on debt tolerance.

     

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