Why Ray Dalio Believes Central Banks Should Rethink Tightening



Ray Dalio on the Fed

During his interview with CNBC from the World Economic Forum (or WEF), Ray Dalio mentioned that the Fed and other central banks around the world should not raise rates faster than the economies can handle. He also said that going by the term structure of rates, the rates shouldn’t rise. He said, “If it rises faster than that, I think we’re going to have another problem.”

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Easy money fueling markets

As we discussed in Why a Fed Policy Mistake Is Worrying Markets, in the past few years, one of the factors fueling US equity markets (SPY) (QQQ) has been cheap money. Therefore, rising rates will put an end to easy money. The concern is echoed by a lot of market participants and experts. JPMorgan Chase’s (JPM) CEO, Jamie Dimon, mentioned in August that unwinding the Fed’s unprecedented quantitative program could backfire on the economy or even spark a market panic.

Fed’s rate hike path

The Fed has already raised the rates four times in 2018 and signaled two more hikes in 2019 during its December 2018 meeting. However, after the market sell-off on a hawkish Fed outlook and weaker economic reports, Fed Chair Powell mentioned at the beginning of January that the Fed could be more patient with rate hikes (TLT). His comments calmed down the markets somewhat. While the markets (IVV) are now discounting a nil to one rate hike in 2019, the Fed’s course of rate hikes could change with the economic data. The Fed is data dependent and if it feels that inflationary pressures have started building up, it might have to tighten rates despite the weakness in equity markets.


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