Bridgewater’s Dalio, Bob Prince on the Federal Reserve raising rates



  • bob prince
    Bob Prince, the co-CIO
    of Bridgewater Associates.

    Bridgewater Associates

    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
    lows.

  • 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
problems.”

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:

  1. “There is not nearly enough inflation and overheating risk to
    make concerns about inflation and overheating of paramount
    importance.”
  2. “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.)”
  3. “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.”
  4. “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 …”
  5. “A downturn in the economy would be intolerable to those with
    lower incomes and wealth, and would make social and political
    tensions dangerous.”

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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