Ray Dalio Issues New Warning on Fed's Policy Shift
Legendary hedge fund leader Ray Dalio cautions that the Federal Reserve's recent policy changes could spark inflation and create financial bubbles. Dalio raised concerns regarding the Fed's decision to halt quantitative tightening (QT) and potentially resume quantitative easing (QE).
Fed's Policy Transition Explained
The Fed has been reducing its nearly $7 trillion balance sheet as part of QT, which is scheduled to end in December. Following this, the Federal Reserve may begin increasing its asset holdings again to support the banking system and economic growth.
"At a certain point, you'll want to start — you'll want to start reserves to start gradually growing to keep up with the size of the banking system and the size of the economy." — Chair Jerome Powell
Expert Perspectives on Fed Actions
Lorie Logan, Dallas Fed President and specialist in money-market mechanics, also indicated that increased asset purchases might be necessary if repo rates remain elevated, to maintain sufficient reserves.
"If the recent rise in repo rates turns out not to be temporary, the Fed in my view would need to begin buying assets to keep reserves from falling further and maintain an ample supply of reserves." — Lorie Logan
Debate Over Terminology: Is It QE?
The Fed’s asset purchases to manage lending rates for commercial banks blur the lines between QT and QE. While the Fed and central banks generally deny labeling these actions as QE (quantitative easing), the distinction can be unclear.
Key Points
- Fed will end balance sheet reduction by December.
- Plans to gradually increase reserves might resume next year.
- Experts warn this may lead to more inflation and asset bubbles.
- The debate continues on whether new asset purchases represent QE.
Summary: Ray Dalio warns the Fed’s shift from reducing its balance sheet to potentially expanding it again risks inflation and financial bubbles amidst uncertain terminology around QE.