Fed balance sheet runoff creating fear in markets: UBS Chairman

After Fed Chair Janet Yellen announced the Fed’s plan to shrink its $4.5 trillion balance sheet while moving interest rates gradually, there are many questions over how this asset reduction will affect equity and bond markets.

“The [Fed] plan involves another rate hike this year plus two to three rate hikes next year and as you said winding down this massive balance sheet of $4.5 trillion and that’s going to be a big issue,” UBS Chairman Axel Weber told FOX Business Network Thursday.

“At the time you know these massive purchases supported the stock market," Weber said. "There is the fear now that letting them run off will be a headwind for markets, and that that could impact on the economy."

In order to avoid as much market volatility as possible, Weber says the Fed should runoff these assets in a very controlled and well communicated way.

“The Fed needs to put almost a straight line and a controlled runoff of these assets off its balance sheet in place and they will do that by letting tenure maturities mature and buying T-bills rather than 10 year bonds and reinvesting not the full amount but only a fraction of that amount in the future,” he said.

Weber says the Fed’s policy plan will allow investors to better diversify their portfolios, especially in the bond market.

“You’re going to have a lot more ability to now diversify to not just equity which was performing really well…but also to allocate into bond markets. Bond market returns look a lot better and so therefore the bond market I think in my view will be improving, and that’s where I think investors will start diversifying their investment,” he said.

Despite some uncertainty, Weber is confident that the economy will continue to remain strong and avoid any major setbacks.

“I think the economy globally is in quite a good spot. Now we don’t see any big problems on the horizon, I think the next big problem that might materialize is actually Brexit…but at this point in time I think the stock market will continue to have some traction.”