Spending cuts, tax hikes needed to spur growth, says CIO; quantitative easing not a game changer
Government spending cuts and tax increases are needed to stimulate economic growth, and another round of quantitative easing by the Federal Reserve won't help much, according to Gary Madich, global chief investment officer for the Columbus fixed income team at J.P. Morgan Asset Management.
“The impact of QE2 will be somewhat limited,” he said in an interview, referring to a second round of quantitative easing by the Fed. “We don't think it changes the long-term scenario of a positive but slow-growth type of environment.”
The Fed is expected to announce its QE2 on Wednesday.
Quantitative easing refers to securities purchases and loans made by central banks to stimulate a country's economy. The Fed's first round of quantitative easing began in 2008 and finished in March.
This next round is expected to be about $100 billion, which would be the equivalent of a 10-basis-point cut in interest rates.
“A lot of that is already priced into the market,” Mr. Madich said.
To see a real impact on the economy, there has to be compromise among policymakers on how to lessen government spending and raise taxes, he said.
“Obviously, quantitative easing is a step in the right direction, but our question isn't about it being wrong policy but about the fact that its impact will be limited,” Mr. Madich said.
If the Republicans take over the House and Senate in the midterm elections, it may only prolong the situation, he said.
“Until we can get to a compromise not just from a political-affiliation standpoint but from a policy affiliation standpoint, it's not going to change anything,” Mr. Madich said.
Looking forward, J.P. Morgan is looking to address investors' need for income-oriented fixed-income funds that have downside protection, he said. The firm is discussing launching a fund in the credit space that would achieve this goal on both a taxable and tax-free basis.
The firm's management team ran $163 billion in fixed-income assets in mutual funds and institutional portfolios as of Sept. 30.
