Billionaire investor Ray Dalio has warned that the U.S. economy is in a stagflation environment and said it would be a mistake for Kevin Warsh, the candidate to succeed the Federal Reserve chairman, 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 chair in mid-May, were to cut rates, it would risk 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.”
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