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For most of this year, the shepherd remained steadfast in his goal of a “soft landing” for inflation, the idea of beating inflation without a dramatic economic downturn.
But despite many interest increases, inflation is still hotand business leaders say it’s not a matter of if a recession will happen, but when.
On Wednesday, after another rate hike, and a promise from Fed chairman Jerome Powell to stay the course until inflation comes down, Bridgewater founder Ray Dalio said the Federal Reserve will likely continue to tighten its monetary policy until high prices come down, regardless of the consequences. As a result, a recession is likely within the next year.
“You start to see all the classic early signs,” he said during an interview with MarketWatch editor-in-chief Mark DeCambre during the outlet’s inaugural Best New Ideas in Money festival. The signs, he said, are the decline in the housing and auto sectors, which are the first to be affected by the Fed’s higher interest rates.
This is not the first time Dalio has sounded the alarm on the impending economic crisis. In June, he already argued with LinkedIn that it was a soft landing out of reach of the Fed, even to defeat Bridgewater the bear market in the first half of this yearwhich gave investors a 32% return while other companies struggled.
Dalio’s comments followed the Fed’s decision this week to institute a third consecutive 75-basis-point rate hike this year. Before June, the last time the bank made such a large rate increase was in 1994.
Those increases have already slowed the growth of the US economy, according to Dalio.
“We are now very close to a 0% growth year,” he said. “I think it will get worse in 2023 and then 2024, with electoral implications.”
After the Fed’s rate hike on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined the others billionaire investors like Carl Icahn and said that the stock market will sink further this year as the Fed continues its hike, adding that the bond market will be hit especially hard.
“Who will buy the bonds?” Dalio asked, noting that there has been a decades-long “bull market” in bonds marked at high prices. “Now you have a negative real return on bonds … and you’re devaluing them.”
Last month, Federal Reserve Chair Jerome Powell said the central bank would hold off until inflation is under control, even if that means “some pain in homes and businesses.”
This week, he is more clear about the cost: “We have to get inflation behind us. I wish there was a painless way to do that. Nothing.”
That pain, said Dalio, will be felt very much in the following years. “The Fed always has a tradeoff,” he said, between economic strength and inflation. In the current inflation target of the bank, it will chart a course until the “economic pain” is considered worse than inflation.
At that point, the bank will start lowering its rate hike. “Now we’re playing the game, what level is that?” said Dalio.
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