For much of this year, the Fed has stuck to its goal of a “soft landing” for inflation, the idea of defeating inflation without a dramatic economic slowdown.
But despite several interest rate hikes, inflation is still going strong and business leaders say it’s not a question 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 drops, Bridgewater founder Ray Dalio said the Federal Reserve would likely continue to tighten monetary policy until high prices come down, regardless of the consequences. As a result, a recession is likely over the next year.
“You’re starting to see all the classic early signs,” he said during an interview with MarketWatch editor Mark DeCambre at the outlet’s first Best New Ideas in Money festival. Those signs, he said, are a contraction in the housing and auto sectors, which are the first to be hit by the Fed’s interest rate hike.
This is not the first time that Dalio has sounded the alarm over impending economic difficulties. He was already claiming on LinkedIn in June that a soft landing was out of the Fed’s reach, even as Bridgewater beat the bear market in the first half of this year, delivering a 32% return to investors while others businesses were struggling.
Dalio’s comments follow the Fed’s decision this week to institute its third consecutive 75 basis point hike this year. Before June, the last time the bank made such a rate hike was in 1994.
These increases have already significantly slowed economic growth in the United States, according to Dalio.
“We are currently very close to a year of 0% growth,” he said. “I think it’s going to get worse in 2023 and then 2024, which has implications for the election.”
After the Fed’s rate hike on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined fellow billionaire investors like Carl Icahn in saying the stock market will continue to slump this year as the Fed continues to hike, adding that the bond market will be hit particularly hard.
“Who is going to buy these bonds?” Dalio asked, noting that there has been a decades-long “bull market” in bonds marked by high prices. “Now you have negative real yields in bonds…and you’ve driven them down.”
Last month, Federal Reserve Chairman Jerome Powell said the central bank would stop at nothing until inflation was brought under control, even if that meant “some pain for households and businesses”.
This week he was even clearer on the cost: “We need to put inflation behind us. I wish there was a painless way to do this. There are not any.
This pain, Dalio said, will be felt very hard over the next few years. “The Fed always has a trade-off,” he said, between economic strength and inflation. With inflation now the bank’s target, it will chart a course until the “economic pain” is judged to be more severe than inflation.
At that time, the bank will begin to scale back its rate hikes. “Now we’re playing the game of, what level will that be?” Dalio said.
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