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Well, Yes, Obviously Mr. Dalio – The Fed Raising Interest Rates Should Impact Asset Prices

This is not the most remarkable observation of all time by Ray Dalio, that the Federal Reserve interest rate rises are reducing asset prices. For the point and purpose of the Fed’s reducing interest rates – and that QE – during the recent unpleasantness was to raise asset prices. Now that’s all over things should return to normal, including the inflationary effects of that increase in the money supply upon asset prices. This isn’t a mistake nor an oversight, it’s the point:

Hedge fund billionaire Ray Dalio argued Thursday that the Federal Reserve has raised rates to a point where they’re hurting asset prices.

The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio said, adding he would err on the side of caution on rate hikes.

Well, part of the point is to lower those asset prices so they are indeed looking, aren’t they?

Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, made those remarks in an interview with CNBC Thursday morning.

“We’re in a situation right now that the Fed will have to look at asset prices before they look at economic activity,” he said. “It’s a difficult position.”

Just for the slow on the uptake or Democrats. Back when everything was falling apart the Fed lowered interest rates, then instituted QE. The purpose here was to lower the yield on safe assets like Treasuries. Lowering the yield is the same as raising the price. The aim being to get people to move out along the risk/yield curve and go and invest in riskier assets in search of that yield. This would boost investment in the real economy and thus bring to an end the falling apart bit.

We can say the same thing another way around, they deliberately made assets more valuable. That means there’s greater incentive to go create these more valuable assets, we get that rise in investment and troubles fall away.

Great, that all worked and yes, QE did work. Any complaint that it just raised asset prices is silly, for the raising was the point. But it has worked. Unemployment is down at generational lows, the economy is booming – actually, in fiscal terms, perhaps a little overstimulated. At which point yes, the Fed should be reversing their earlier actions. The Fed should be raising interest rates to bring asset prices down again. Once more, this is not an error nor an oversight, it’s the point.

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5 years ago

QE in America worked, and it took seven years to work. It’s possible that it delayed the turnaround. It’s possible and even probable that it made only a minor contribution to the recovery, and that other factors were more causal. We do know that QE headed straight for the USA’s two bourses and made a whole lot of investors very rich, although the Joe Does won as well as the gains in the stock portions of their retirement plans easily outpaced the loss resulting from zero or negative real interest rates. House prices took off as well. Investment in productive… Read more »

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