Billionaire investor Ray Dalio says stocks still aren't pricing in the Fed pushing rates near a 'very harmful, very damaging' level
Stocks haven't priced in the Fed pushing rates near a "very harmful, very damaging level," Ray Dalio said.
The billionaire investor estimated the Fed may raise rates to 5%-5.5%, which could weigh heavily on all markets, but especially stocks.
That damage also hasn't been priced in yet, as markets are expecting a fall in inflation and a fall in rates, he warned.
Markets aren't pricing in the Federal Reserve pushing rates toward a "very harmful, very damaging level," according to billionaire investor Ray Dalio, warning investors that an impending drop in the stock market could be in the cards.
In an interview with Business Today on Wednesday, the Bridgewater founder said inflation may settle at 4.5%-5%, still above the Fed's 2% target, meaning policymakers would have to raise rates to a level approaching 6%.
"The Federal Reserve will put the short-term rate up towards that level, which is very harmful, very damaging to the economy," he said. "But what the Federal Reserve is trying to do is balance those, having an interest rate that's high enough for the creditor, but not so high for the debtor. And so, what you're going to see is a slowing of the pace of the rise, but still approaching over 5%, probably in the vicinity of 5.5%. This will still have an effect on all markets, particularly stocks."
Previously, Dalio estimated rates past 4.5% would spark a recession and a 20% drop in stocks, in line with predictions from Bank of America, Morgan Stanley, and Deutsche Bank.
But that damage hasn't yet been priced into stocks, he said, adding that markets have discounted a fall rather than an increase in rates, as well as a fall in future inflation. Inflation cooled ahead of economists' expectations to 7.7% October, but that was largely been spurred by external factors like falling oil prices, Dalio said, and prices could stay higher for longer as well.
"What you see built into the curve today is a fall-off in rates and a fall-off in inflation. But I believe that you'll see it staying higher than those levels that are built into market expectations now," he added.
That's upping risks for stagflation, something economists have been eyeing as inflation skyrocketed to a 41-year-record this summer.
Top economist Mohamed El-Erian warned that the US was already slipping into a stagflation crisis, and "Dr. Doom" economist Nouriel Roubini sounded alarms for an even more severe stagflationary debt crisis, a market crash that combines elements of 70s-style stagflation and the 2008 financial crisis.
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