The world’s largest hedge fund Bridgewater Associates said policymakers around the globe are currently navigating new “limits”, but the US, arguably the most important economy of them all, is showing signs of risks in its monetary policy.
At the Investment Magazine Fiduciary Investors Symposium on Tuesday, senior portfolio strategist Atul Lele explained these limits are not just statistics like the budget deficit, national debt, or how much money is being printed. Rather, the ultimate limits are prices – of goods and services, assets and currency – and policymakers are “pushing or pulling” them to maintain economies in equilibrium.
In dealing with these limits, Lele said there are two things that matter most to policymakers.
“Number one is how nimble you are, and number two is do you have institutional credibility,” he told the symposium in Healesville, Victoria.
The latter quality of US policymakers is being threatened by recent comments made by Republican candidate Donald Trump. In a recent interview with Bloomberg, the former president said he should “have the right” to talk to the Fed chair about interest rate decisions and “whether they should go up or down a little bit”.
“[He] is talking about essentially removing Fed independence…that is a big deal,” Lele said. “That’s why I say monetary policy is actually where the credibility issue may end up being.”
The world’s largest economy will hold its blockbuster election in one week and when asked whether both parties’ significant fiscal expansion plans could be considered nimble or credible, Lele said “the US isn’t really up against any limits” with its fiscal policy.
“The reason I say that it’s less of an issue is number one, you don’t have the US up against it from a currency perspective,” he said.
“The US dollar is really strong.
“Number two, it’s fine for fiscal policy to be expansionary. The question is what you do with it. And that’s a really important question today because of that bottom line item, which is productivity.”
Lele said fiscal policy is currently “holding the baton” of productivity growth but the question is whether it can eventually hand that over to the private sector. This needs to come through productive investment; however, business fixed investment in the US is low right now and the main corporations which are spending are primarily the Magnificent Seven on AI-related capex, he said.
“That ends up becoming a big question for investors, because if we think…where investors are today, risk premiums are really narrow. A lot of EPS growth is being priced in,” he said.
“The only way you get this justified is if you actually get productivity growth coming through.”
Elsewhere, Lele said Bridgewater is keeping an eye on five big policy areas in the upcoming election: fiscal policy; tariffs; regulation; Fed independent; and immigration. He acknowledged that Bridgewater had underestimated the impact of immigration on inflation in the current US economic cycle.
“Whether it was through illegal border crossings or just people that didn’t really come into skilled parts of the workforce, you ended up seeing this surge in immigration that actually meant that inflation will come down in a pretty meaningful way, up against really strong economic growth,” he said.
“In just over a week’s time, we could see those policies change very meaningfully.
“In an economy like the US, [if] you’re not actually getting that immigration in, you’re looking at a very, very inflationary type environment.”
