Will The Fed Do A Repeat Of 1937?

Ray Dalio, founder of the world’s largest hedge fund company Bridgewater Associates, told investors that there is a risk that the Federal Reserve is seemingly creating the same situation on the market as in 1937, when it raised interest rates too quickly.

The odds that the Federal Reserve will raise interest rates in June or September are high and it is becoming hard for policy makers not to deliver, according to Ray Dalio and his colleague Mark Dinner.

Bridgewater always assumes cyclicality and the hedge fund, which has 165 billion dollars under management, does not want to make concentrated moves on the financial markets. Both Bridgewater as well as the Fed don’t know how much of a rate hike will cause trouble. Dalio and Dinner, however, believe that being more cautious than ever would not be bad advice for the Fed.

Fed is a blockhead

Dalio also supports bond king Jeffrey Gundlach’s statement, who warned that the Fed is risking having to undo its steps if interest rates are raised too quickly. Gundlach, co-founder of DoubleLine Capital called the Fed a blockhead, because it has not learned from the mistakes of other central banks around the globe.

In Bridgewater’s note the comparison was made between recent years and the situation on the markets in 1937. In both periods interest rates went down to 0, expansive monetary policies caused a rally in the stock market, and the US economy recovered, the note reads.

When the Fed started tightening its monetary policies in multiple phases, however, bonds were sold-off en masse and the stock market crashed by more than 50 percent from the 1937 peak to March 1938.