US policymakers will loosen monetary policy, not tighten it, in their next move, says Bridgewater Associates, the world’s largest hedge fund.
Founder Ray Dalio said the Federal Reserve is paying too much attention to the short-term ups and downs of the business cycle rather than the longer-term ramifications of central banks driving interest rates to zero.
That leaves them no room to act if worldwide deflation takes hold, Reuters reports.
“The ability of central banks to ease is limited at a time when the risks are more on the downside than the upside and most people have a dangerous long bias,” said Dalio, who helps manage US$162 billion in the hedge fund.
“Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.”
Dalio said it should now be apparent that the risks of deflationary contractions are increasing, relative to the risks of inflationary expansion.
He said that since the early 1980s, each subsequent decline in interest rates was lower than the previous one, encouraging more borrowing and more leverage.
“These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets — at the same time as the world is holding large leveraged long positions,” Dalio said.
Dalio said the Fed has overemphasized the importance of the cyclical short-term business cycle in its desire to raise rates but has been less attentive to the longer-term trend toward deflation.
He said the Fed will react “to what happens,” suggesting it should undertake more quantitative easing, or QE, but he isn’t positive of that, given Fed officials’ desire to raise rates.
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