For most of this year, the Fed has remained steadfast on its goal of a “soft landing” of inflation, and the idea of beating inflation without a dramatic economic downturn.
But despite the many hikes in interest rates, inflation is still climbing, and businessmen say it’s not a question of whether a recession will happen, but when it will happen.
On Wednesday, after another rate hike, and a promise from Federal Reserve Chair Jerome Powell to stay on track until inflation drops, Bridgewater founder Ray Dalio said the Fed will likely continue to tighten monetary policy until high rates come down, regardless of Archaeology. As a result, a recession is likely over the next year.
“I’m starting to see all the early classics,” he said during an interview with MarketWatch editor-in-chief Mark Decamper during the opening port of the inaugural Money Festival’s best new ideas. He said those signs are the contraction in the housing and auto sectors, which are the first to be affected by the Fed’s high interest rates.
This is not the first time Dalio has sounded the alarm about an impending economic problem. In June, he was already arguing on LinkedIn 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 for investors while other companies struggled.
Dalio’s comments came on the heels of the Federal Reserve’s decision this week to force a third consecutive rate hike of 75 basis points this year. Before June, the last time the bank made such a big rate hike was in 1994.
Those increases have already significantly slowed economic growth in the United States, according to Dalio.
“We are now very close to a year of 0% growth,” he said. I think things will get worse in 2023 and then 2024, which will have repercussions for the elections.
After the Federal Reserve raised interest rates on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined other billionaire investors like Carl Icahn and said the stock market will fall further this year as the Federal Reserve continues its increases, adding that the bond market will be hit particularly hard.
“Who will buy those bonds?” asked Dalio, noting that there has been a “bullish market” for several decades in bonds characterized by rising prices. “Now you have negative real yields in bonds… and you made them go down.”
Last month, Federal Reserve Chairman Jerome Powell said the central bank would stop at nothing until inflation is brought under control, even if it means “some pain for households and businesses.”
This week, he’s been clearer about the cost: “We have to get inflation behind us. I wish there was a painless way to do it. There isn’t.”
Dalio said this pain will be felt more intensely over the next few years. “The Fed always has a trade-off between economic strength and inflation,” he said. Since inflation is now the bank’s goal, it will chart a course until it is deemed “economic pain” to be more severe than inflation.
At this point, the bank will start tapering off its interest rate increases. “Now we play a game, what level will it be?” Dalio said.
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