Billionaire investor Ray Dalio has warned that the US economy is entering an environment of stagflation and said it would be a mistake for potential Federal Reserve successor Kevin Warsh to lower interest rates.
The Bridgewater Associates founder said persistent inflationary pressures coupled with slowing growth are creating a backdrop for policymakers to exercise caution.
“We are certainly in a period of stagflation,” Dalio said Monday on CNBC’s “Money Movers.” “We are far from our goal in terms of more immediate inflation because of the problems here.”
Dalio said if Warsh, who has a clear path to succeeding Jerome Powell as the next Fed chairman in mid-May, were to cut rates, there was a risk of undermining confidence in the central bank at a critical juncture.
“Certainly, we’re not going to cut rates now,” Dalio said. “You’re going to lose confidence, especially now the Federal Reserve is going to lose that confidence. … If you look at monetary policy in other countries, you’re not going to see monetary policy cut,” he said. “So whatever the benchmark is, we’re not going to reduce it with today’s information.”
According to the CME FedWatch tool, traders are currently pricing in a 100% chance that the Fed will leave interest rates unchanged at its meeting this week, with federal funds futures indicating policy will most likely remain unchanged for the rest of the year.
Dalio said the dramatic rebound in stock prices makes sense because corporate earnings are strong despite the ongoing war with Iran. Still, he said he recommends allocating 5% to 15% to gold as an “effective diversifier.”
