The Federal Reserve will soon begin to discuss the need to remove some of those extraordinary, unprecedented monetary stimulus measures that were launched in 2020 as a response to the coronavirus emergency. This emerges from the statements, which were released yesterday evening, by the number one of the American central bank Jerome Powell who will testify today in the US House of Representatives talking about the response that the American central bank has given to the Covid-19 pandemic.
Financial market risk in turmoil
Fears related to future US rate hikes frightened financial markets. The yield curve flattened violently, with short- and medium-term yields rising sharply last week while long-term yields fell; Also last week, the dollar rose and stocks fell, although growth-oriented equities outperformed. So he explained Ray Dalio, billionaire investor and founder of Bridgewater Associates, the largest hedge fund in the world, speaking to the economist and former treasury secretary Lawrence Summers at the Qatar Economic Forum. Both Dalio and Summers believe that we are moving towards a period of overheating and inflation that could threaten economic recovery.
Dalio warned that it will be difficult to avoid overheating of “monetary inflation” due to a flood of bond issues. With the US deficit destined to increase, the country will have to sell a lot of bonds to investors, despite very low interest rates and negative, or inflation-adjusted, real inflation rates, Dalio said. All of this comes at the same time as China’s capital markets and other capital markets are becoming more attractive to global investors. “This creates a supply / demand situation that can lead to further monetary inflation because there won’t be enough demand to buy those stocks,” said Ray Dalio. As a result, the Fed will not be able to reduce or decrease its bond purchases and may actually have to increase those purchases to prevent interest rates from rising, he said.
The Fed cannot make squeezes without having major negative effects on the markets Dalio commented, recalling that “we saw the reaction of the markets when the Fed even hinted at a tightening. I don’t think they can tighten a lot without having a big negative effect ”.
“It’s easy to say that the Fed should tighten, and I think it should,” Bridgewater Associates founder explains. But I think you will see a very sensitive market, and a very sensitive economy. Just the slightest touch on those brakes has the effect of damaging the markets and even switching to the economy ”.