Larry Summers and Ray Dalio flag return of quantitative easing

Investors believe that the recent market ructions have almost killed off the chances of a Federal Reserve interest rate increase next month, but some big-name industry figures are going even further, predicting that the central bank’s next move will be to restart quantitative easing.

Lawrence Summers, the former Treasury secretary, and Ray Dalio, head of the world’s biggest hedge fund manager, this week indicated that the US central bank should consider restarting its “quantitative easing” programme to counter deflationary dangers and ameliorate tensions on financial markets. In an opinion piece in the Financial Times, Mr Summers wrote that raising rates in the near future would be a “serious error”, but later went further and suggested on Twitter that the Fed should even consider another bond buying programme.

“It is far from clear that the next Fed move will be a tightening,” he wrote. “As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation . . . Right now problems are not overconfidence or investors oblivious to risk, so no need for Fed to send shock across investors’ bow.”

That was echoed by Mr Dalio, the head of Bridgewater, a $200bn hedge fund group. In a note to clients on Monday afternoon he predicted that the “next big Fed move will be to ease (via QE) rather than to tighten” due to global debt levels, the Chinese ructions and turbulence in emerging markets as a whole. “While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces,” he wrote.

“Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required,” he added, in the note seen by the FT.

As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation . . . Right now problems are not overconfidence or investors oblivious to risk, so no need for Fed to send shock across investors’ bow

While more quantitative easing is clearly a minority view at the moment, economists and investors have drastically scaled back their forecasts for when and how quickly US interest rates will rise in the coming months.

Futures markets indicate that there is now just a 26 per cent chance of a rate increase in September, down from more than 50 per cent earlier this month. The probable future path of rate rises has also moderated markedly, according to Bloomberg data. Economists at Barclays on Monday even shifted their forecast for when the first rate rise will come from September to March next year.

Other economists are less concerned, and argue that another QE programme would either be ineffectual or counterproductive by signalling that the Federal Reserve is panicking. They point out that the US unemployment rate could easily fall below 5 per cent this year, indicating the need for tighter monetary policy.

Joseph Lavorgna, chief US economist at Deutsche Bank said. “Investors are overreacting in notoriously illiquid markets. You have to look at the fundamentals. I don’t believe that one or two hikes will send the global economy into a tailspin.”