PARIS (Reuters) - Markets have overreacted to the U.S. Federal Reserve’s plans to stop buying bonds but part of the problem is a lack of clarity over how it will be done, the International Monetary Fund said on Tuesday.
“The Fed has no clue what will happen when it starts selling assets,” IMF Chief Economist Olivier Blanchard told a meeting of the Institute of International Finance in Paris. “So it cannot make any commitments in term of quantities.”
He was speaking less than a week after the U.S. central bank set off a cascade of selling in global markets by saying it expected to reduce its bond-buying later this year.
Fed Chairman Ben Bernanke also said that the central bank expected to halt the program, known as quantitative easing (QE), altogether by mid-2014 if the U.S. economy improves as forecast.
Two top Fed officials, however played down on Monday the idea of an imminent end to monetary stimulus.
Blanchard said what was being seen now was the Fed trying to find a way of giving rules to markets in an area where they do not exist yet.
“Conceptually it (QE exit) is not fundamentally very difficult, but there is a problem of communication on how you do it, which is going to create volatility. But the volatility we have seen in the past week is exaggerated,” Blanchard said.
Global equities, bond prices and commodities, boosted for months by major central banks’ stimulus plans, tumbled after the Fed’s comments. They were also hit by a cash crunch in China
Blanchard added that the U.S. economy was recovering and talk of a QE exit was therefore expected. “The issue is around the speed of exit from QE,” he said.
Earlier this month, the International Monetary Fund recommended that the Fed stick to its bond-buying program at least until the end of the year.
Additional reporting by Steve Slater; Writing by Natalie Huet Editing by Jeremy Gaunt.