Bridgewater Associates founder Ray Dalio is predicting the efforts by Federal Reserve Chairman Jerome Powell to tame inflation will only result in a new era of long-term stagflation.
In a posting on his LinkedIn page, the Westport-based hedge fund executive argued that the Powell strategy will result in a state that will replicate the U.S. economy of the 1970s and early 1980s when high inflation and economic stagnation combined into a period of stagflation.
“I now hear it commonly said that inflation is the big problem so the Fed needs to tighten to fight inflation, which will make things good again once it gets inflation under control,” Dalio wrote. “I believe this is both naïve and inconsistent with how the economic machine works. That”™s because that view only focuses on inflation as the problem and it sees Fed tightening as a low-cost action that will make things better when inflation goes away, but it”™s not like that.”
Dalio argued that the central bank”™s plan will impact consumer spending and dilute Americans”™ buying power.
“The only way to raise living standards over the long term is to raise productivity and central banks don”™t do that,” he stated, adding that it be more practical for Powell to “drive the markets and economy like a good driver drives a car ”“ with gentle applications of the gas and brakes to produce steadiness rather than by hitting the gas hard and then hitting the brakes hard, leading to lurches forward and backward.”
Dalio concluded that the inflation dilemma impacting the nation might be too big for Powell to successfully tackle.
“There isn”™t anything that the Fed can do to fight inflation without creating economic weakness,” Dalio said. “With debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy, and over the long run the Fed will most likely chart a middle course that will take the form of stagflation.”
