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The stock market doesn’t anticipate the possibility of the Federal Reserve raising interest rates to “very damaging” levels and could face a sharp correction in 2023, according to billionaire investor Ray Dalio.
The Bridgewater Associates founder said on Wednesday that inflation could settle somewhere around 4% or 5% – well above the Fed’s preferred target of 2%. If that happens, he warned that the US Federal Reserve will have to raise interest rates to a range close to 6%.
“The Federal Reserve is going to raise the short-term interest rate to this level, which is very damaging, very damaging to the economy,” Dalio said in an interview with Business Today.
He added: “But the Federal Reserve is trying to offset this by having an interest rate that is high enough for the creditor but not so high for the debtor. The pace of the increase but still towards above 5%, probably in close to 5.5%. This will continue to affect all markets, especially equities.”
BOFA WARNS THAT THE S&P 500 COULD FALL 20% IN THE COMING MONTHS IF THE RECESSION COMES
Ray Dalio, billionaire investor and founder of Bridgewater Associates LP, speaks during the Milken Institute Global Conference in Beverly Hills, California on May 1, 2019. (Patrick T. Fallon/Bloomberg via Getty Images)
The S&P 500 is already down more than 4% this week as worries of sky-high inflation, rising interest rates and a weakening economic outlook continue to weigh on the market. The Dow Jones Industrial Average, meanwhile, is down nearly 1,000 points, while the tech-heavy Nasdaq Composite is down about 5%.
| ticker | security | Last | change | change % |
|---|---|---|---|---|
| Me: DJI | DOW JONES AVERAGES | 33597.92 | +1.58 | +0.00% |
| I: COMP | NASDAQ COMPOSITE INDEX | 10958.553335 | -56.34 | -0.51% |
| SP500 | S&P500 | 3933.92 | -7.34 | -0.19% |
Dalio previously warned that higher interest rates could trigger a 20% drop in share prices due to the present value discount effect. In addition, there would be another 10% negative impact from falling incomes, he said in September.
The Fed has launched its most aggressive tightening campaign since the 1980s as it attempts to rein in inflation, which is still near a 40-year high. The current Federal Funds benchmark range of 3.75% to 4% is well within restrictive territory and the Fed has shown no sign of a pause as inflation remains unusually high.
FED’S POWELL SIGNALS MINOR RATE HIKES COULD START IN DECEMBER
FILE – Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, DC, May 4, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)
Although policymakers favor a smaller 50 basis point rate hike when they meet next week, they have also signaled an appetite for a higher top rate that could further constrain economic activity.
Fed Chair Jerome Powell said rates are likely to hit “slightly higher” levels than policymakers initially forecast in September, when they forecast a median interest rate of 4.6% for 2023.
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“The time to slow the pace of rate hikes could come as early as the December meeting,” Powell said during a speech in Washington last month how much further we need to raise rates to control inflation, and how long it will take will be to keep monetary policy at a restrictive level.”