The 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 annual meeting got underway 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 U.S., 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%, the weakest since 2016 but a still relatively robust pace.
Fed Chairman Jerome Powell has already signaled the U.S. central bank may be more patient in raising interest rates after doing so four times last year, while European Central Bank President Mario Draghi has warned that uncertainties "remain prominent."
"We're slowing, but we're still growing," said Philipp Hildebrand, vice chairman of BlackRock (BLK) Inc. (BLK) 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 said. The Fed, for example, has a current rate target range of 2.25% to 2.5%, 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," Mr. Hildebrand said.
UBS Group AG 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 Mr. Weber said "will never even leave negative territory if they don't start raising rates this year."
"In general, monetary policy normalization is not an issue for this cycle. It's for the next cycle," he said. "It will be mission aborted" at the ECB.
Also in Davos, former Indian central bank governor Raghuram Rajan said Fed needs to be more reliant on data, just as Chairman Jerome 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 J.P. Morgan 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 said.