Bridgewater, the world’s largest hedge fund firm,
says the Federal Reserve and other central banks will cause
problems by raising interest rates from historic
Bridgewater says the Fed has miscalculated the risks,
such as economic sensitivity to interest-rate changes.
The world’s largest hedge fund told clients the Federal Reserve
was making a mistake by raising interest rates.
“The Fed is basing its moves on classic cyclical indicators and
the desire to ‘normalize’ the balance sheet,” Bridgewater
Associates told clients in a private note, which was seen by
Business Insider. “Based on the calculations that we do, we doubt
that the Fed will be able to execute its plan without causing
Bridgewater founder Ray Dalio, co-CIO Bob Prince, and staffer
Melissa Saphier wrote the note, dated September 21. The firm,
based in Westport, Connecticut, manages about $160 billion.
The Fed has twice raised rates this year, and investors expect it
to do so a third time at its meeting in December. The central
bank kept rates at historic lows following the 2008 financial
crisis to boost the economy — a move originally welcomed by a
Wall Street on the brink but since challenged by banks yearning
for higher returns.
In an announcement last week, the Fed also said it would begin
shrinking its $4.5 trillion balance sheet next month, the
agency’s biggest postrecession policy shift since it started
raising rates in 2015.
In the note, under the header “Why we think going down this path
is a mistake,” Bridgewater laid out five reasons:
- “There is not nearly enough inflation and overheating risk to
make concerns about inflation and overheating of paramount
- “Risks are asymmetric on the downside (i.e., it’s tougher to
reverse an economic and market decline with an easing than it is
to reverse an economic or market acceleration with a tightening
because of the proximity of interest rates to 0% and because
easing with QE is now less effective.)”
- “Tightening at rates that are faster than are built into the
yield curve is likely to trigger negative wealth effects because
the effective durations of assets are now very long.”
- “Economic sensitivities to interest rate changes are greater
than normal because the level of global indebtedness and non-debt
obligations (especially pensions and healthcare) in dollars and
other currencies is high …”
- “A downturn in the economy would be intolerable to those with
lower incomes and wealth, and would make social and political
Dalio has previously discussed this topic, most recently while
making the rounds at media outlets to promote his new book.
In an interview with
Business Insider’s Henry Blodget this month, he said: “The
risks are asymmetric on the downside … If you tighten monetary
policy, certainly by more than is discounted in the market — and
what’s discounted in the market is a very minor rising market —
that that will reverberate through asset class prices.”
Russell Sherman, a spokesman for Bridgewater at its external
public-relations agency Prosek Partners, declined to comment.
Pedro da Costa contributed to this story.
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