Billionaire investor Stan Druckenmiller urged the Federal Reserve to pause its “double-barreled blitz” of higher interest rates and tighter liquidity when economies are slowing and markets are falling, in an opinion piece in Sunday’s Wall Street Journal.
“We believe the U.S. economy can sustain strong performance next year, but it can ill afford a major policy error, either from the Fed or the rest of the administration,” wrote Druckenmiller and Kevin Warsh, a former member of the Federal Reserve Board.
The Fed at its meeting this week should note developments including global central-bank liquidity reversing from around Oct. 1 and stocks beginning their descent, wrote Druckenmiller, who heads Duquesne Family Office, and Warsh, a visiting fellow in economics at Stanford University’s Hoover Institution.
Officials will pull the trigger on another rate increase at the Dec. 18-19 meeting before slowing hikes in 2019 as risks to the U.S. economy mount, according to a Bloomberg survey this month. Economists predict an immediate quarter-percentage-point hike, while dialing back expectations for next year to two moves, in March and September, from the three forecast in September.
Rate-Hike Warnings
Other money managers have issued warnings about rate hikes too. Hedge fund founder Paul Tudor Jones said this month that the Fed is unlikely to move in 2019 as falling commodities prices threaten a slowdown of the economy.
Expectations of more Fed tightening next year come at a dangerous time, with economic growth outside the U.S. slowing in recent months along with trade, Druckenmiller and Warsh said. “No ocean is large enough to insulate the U.S. economy from slowdowns abroad,” the duo wrote.
Declines in markets -- including in economically sensitive sectors like banking, housing and transport -- and a softening of credit are among additional warning signs for policy makers, they said.
Difficult Challenge
The Fed’s new leaders face the most difficult challenge since Chairman Ben Bernanke’s team confronted financial shocks in 2007-08, they wrote.
Druckenmiller and Warsh argue that policy makers could have avoided today’s predicament to some degree. If the Fed had stopped quantitative easing in 2010, it might have mitigated asset-price inflation and a government-debt explosion. When Chair Jerome Powell arrived at the Fed this year, policy makers could have shrunk the balance sheet quickly before hiking rates, they wrote.
Only a few months ago, in September, Druckenmiller urged the Fed to keep raising rates. Officials had passed up “many golden opportunities” to hike and should press ahead with increases at every meeting until there was a substantial disruption, he said in an interview with the chairman of 13D Global Strategy & Research.
For Druckenmiller, that moment appears to have arrived.
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