In Davos, investors agree: Fed must rethink tightening

Davos

THE US Federal Reserve and other major central banks are right to rethink their plans to tighten monetary policy in 2019 as global growth slows, according to the investors and former policymakers attending the Davos summit.

As the World Economic Forum's (WEF) annual meeting got underway on Tuesday, billionaire investor Ray Dalio chastised monetary policymakers for an "inappropriate desire" to tighten monetary policy faster than the capital markets could handle, but expressed hope that they were now looking to shift more slowly.

"The US, Europe, China - all of those will be experiencing a greater level of slowing, probably a great level of disappointment," Mr Dalio, the founder of hedge fund Bridgewater Associates, said on a panel. "There's a reasonable chance that by the end of that, that monetary policy and fiscal policy may have to become easier relative to what is discounted in the market."

Concern over the outlook for the world economy shaped the first day in Davos with most of those present declaring a slowdown was underway, while predicting a recession should be avoided. The International Monetary Fund on Monday cut its forecast for global growth this year to 3.5 per cent, the weakest since 2016 but a still relatively robust pace.

Fed chairman Jerome Powell has already signalled the US central bank may be more patient in raising interest rates after doing so four times last year, while European Central Bank (ECB) president Mario Draghi has warned that uncertainties "remain prominent".

"We're slowing, but we're still growing," said Philipp Hildebrand, vice chairman of BlackRock Inc and a former governor of the Swiss National Bank. "The key risk is a policy mistake."

Unlike prior to the last recession in 2009, central banks are short of ammunition to fight a slump so should be wary of causing one by restricting policy too much, he felt.

The Fed, for example, has a current rate target range of 2.25 per cent to 2.5 per cent, about half the 500 basis points in cuts it made to fight past downturns.

"What worries me most is if we were to run into a serious problem, a recession or something worse, we would have very limited firepower left to respond to it," added Mr Hildebrand.

UBS Group chairman Axel Weber, a former president of the Bundesbank, said that central banks were too slow to raise rates during better times, and that the current soft patch could lead to another pause.

That has particular implications for the ECB, which he said "will never even leave negative territory if they don't start raising rates this year", adding: "In general, monetary policy normalisation is not an issue for this cycle. It's for the next cycle."

"It will be mission aborted" at the ECB.

Also in Davos, former Indian central bank governor Raghuram Rajan said the Fed needs to be more reliant on data, just as Mr Powell has pledged to be.

"The Fed has to go by what it sees as activity, it has to become far more contingent than it was last year," Mr Rajan said in a Bloomberg Television interview. "The volatility last year, as well as genuine fears about whether activity would slow given the uncertainty created about policy, has rightfully put the Fed in a more tentative mood."

Still, Jacob Frenkel, the chairman of JPMorgan Chase International, said while trade and political issues might prompt a pause in the Fed's hiking cycle it could resume tightening. "I will not rule out the fact that the Fed will continue raising rates," he noted.

Earlier as business and political leaders arrive in the Swiss Alps for the annual meeting, a surprisingly alarming letter from an influential investor who studiously eschews attention has already emerged as a talking point.

The letter, written by Seth A Klarman, a billionaire investor known for his sober and meticulous analysis of the investing world, is a huge red flag about global social tensions, rising debt levels and receding American leadership.

Mr Klarman, a 61-year-old value investor, runs Baupost Group, which manages about US$27 billion. He doesn't make the annual pilgrimage to Davos, but his words are often invoked by policymakers and executives who do.

His dire letter, which is considerably bleaker than his previous writings, is a warning shot that a growing sense of political and social divide around the globe may end in an economic calamity."It can't be business as usual amid constant protests, riots, shutdowns and escalating social tensions," he wrote.

He made the remarks in a 22-page annual letter to his investors, which include the endowments of Harvard and Yale and some of the wealthiest families in the world. It was being passed around before the Davos gathering.

Mr Klarman expressed bafflement at how investors often shrugged off US President Donald Trump's Twitter outbursts and the retreating American role in the world during the past year.

"As the post-World War II international order continued to erode, the markets ignored the longer-term implications of a more isolated America, a world increasingly adrift and global leadership up for grabs," he wrote.

Citing the "yellow vest" marches in France that spread throughout Europe, Mr Klarman said: "Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this." He added: "Social cohesion is essential for those who have capital to invest."

Mr Klarman, sometimes called the "Oracle of Boston", is one of the few financiers ever praised by that Omaha oracle, Warren Buffett. His views are so sought after that an out-of-print book he wrote about value investing sells for as much as US$1,500 on Amazon.

The circulation of his letter is likely to add to the hand-wringing that typically takes place in Davos during a week of panels and conversation over Champagne and canapés. BLOOMBERG, NYT