Published: Aug 25, 2015 3:12 p.m. ET
By
MARK
DECAMBRE
SUE
CHANG
MARKETS REPORTER
Bloomberg News/Landov
Ray Dalio, chairman and co-chief investment officer of Bridgewater Associates.
Never mind raising interest rates — Ray Dalio, founder of the world’s largest hedge fund, is predicting that the Federal Reserve will launch a fresh round of quantitative easing rather than tightening at its coming policy meeting in September.
The Bridgewater Associates boss argues in a post on his LinkedIn account that the growing risk of deflation — not inflation — is pressuring the U.S. central bank’s decision on raising interest rates, something it has not done since 2006. The looming deflation factor is perhaps best seen in commodity prices. Crude-oil futures CLV5, -0.15% for example, have plunged 17% this month alone, much of it blamed on sluggish energy demand in China.
China’s slowing economy, underscored by Beijing’s decision Tuesday to cut its benchmark interest rate after a fresh 7.6% slide in the Shanghai Composite SHCOMP, -7.63% has been a deep source of worry for global markets.
Over the past week, the selloff in China had led to a global rout in stocks and sent investors running to havens like 10-year Treasury notes TMUBMUSD10Y, -0.51% until markets stabilized Tuesday. Yields have ticked back above 2% as stocks rallied early in Tuesday’s session. Bond yields move inversely to prices. That is the backdrop against which the Fed is expected to hike rates at its two-day policy meeting starting Sept. 16.
Already, futures markets are pricing in a 21% chance of a rate hike in September, according to CME Group’s FedWatch tool, down from 50% a few weeks ago.
Read: September Fed-hike bets dropping like a stone
To be sure, the Fed’s ability to provide any more easing, with rates already at ultra-low levels, seems limited. But that is part of Dalio’s argument, that the Fed will have very little wiggle room to act to alleviate problems if deflationary pressures truly take hold of the markets.
Dalio points out that since 1981, every cyclical peak and cyclical low in interest rates were lower than previous points until short-term interest rates eventually fell to 0%, which prevented a further rate cut. In response, central banks had to print more money and buy bonds.
“That’s where we find ourselves now,” he said. “Interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high. As a result, 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 differently, the risks of the world being at or near the end of its long-term debt cycle are significant.”
Fed officials have said they would need to see inflation—the Fed views 2% as a healthy level—to be on solid footing before lifting rates, in addition to an improving employment picture.
On Tuesday, Larry Summers, former U.S. Treasury Secretary reiterated comments on CNBC that he made Monday, calling for the Fed to hold off on raising rates. Summers, like Dalio, is worried about the impact a rate increase might have on inflation. Summers believes that the Fed risks missing its 2% inflation target by increasing rates too rapidly.
One question for Dalio, who manages some $169 billion, is whether he’s actually putting his money where his mouth is.
Quantitative easing seems like an unlikely proposition given that Fed Chairwoman Janet Yellen (and other Fed members) has been very vocal about her desire to normalize monetary policy.
With volatility stepping higher, the most likely move by the U.S. central bank might be a delay in a rate increase to later this year or next, as Barclays has recently predicted.