As Federal Reserve Chairman Jerome Powell grilled on runaway inflation on Wednesday, Bridgewater Associates founder Ray Dalio warned that the central bank’s efforts to tame scorching-heated inflation would likely stagnate in the long term. .
Stagflation is a combination of economic stagnation and high inflation, characterized by rising consumer prices, as well as high unemployment. The event devastated the US economy in the 1970s and early 1980s, as rising oil prices, rising unemployment and easier monetary policy raised the consumer price index to 14.8% in 1980, prompting Fed policymakers to support that. The year was forced to raise interest rates to around 20%. ,
Dalio wrote in a LinkedIn post on Tuesday, “I have now generally said that inflation is the big problem, so the Fed needs to be tougher to fight inflation, which will make things look good again once inflation is under control.” ” “I believe this is both nave and inconsistent with the way the economic machine works. This is because this approach focuses only on inflation as the problem and it denies the Fed as a low-cost action. I see who will make things better when inflation goes away, but it’s not like that.”
Billionaires argue that a tightening of the Fed reduces inflation because it lowers consumers’ spending, it also takes away their purchasing power.
“The only way to raise living standards in the long run is to increase productivity and central banks don’t do that,” he said.
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To do its job effectively, Dalio believes the Fed should focus on using its powers “to drive markets and the economy like a good driver drives a car – gas and To create stability instead of hitting with gentle applications of the brakes. Gasing hard and then hitting the brakes hard, causing swaying back and forth.”
He also emphasized that the central bank needs to keep debt assets and liabilities “relatively stable” and not allow them to become too large to manage.
However, he points out that the Fed’s latest move from printing and buying nearly $1.5 trillion of debt annually to selling it at $1.1 trillion a year and rapidly reducing and raising interest rates results in a massive back and forth. There was a decline.
He also said it is “nearly impossible” for the Fed to raise interest rates high enough to adequately compensate holders of debt assets for inflation, without them having strong debtors, markets and a strong economy. Be much more to support.
“There is nothing the Fed can do to fight inflation without creating economic weakness,” Dalio concluded. “The higher debt assets and liabilities are and are projected to grow due to government deficits, and the Fed selling government debt as well, the more likely private credit growth will have to contract, weakening the economy, and in the long run the Fed will continue to grow.” Will most likely chart a medium course which will turn into a stalemate.”
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Earlier this month, the Fed raised its benchmark interest rate by 75-basis points for the first time in nearly three decades. The move puts the key benchmark federal funds rate between 1.50% and 1.75%, the highest since the pandemic began two years ago.
Officials also set an aggressive path of increasing rates for the rest of the year. New economic projections released after the Fed’s two-day meeting showed policymakers expect interest rates to reach 3.4% by the end of 2022, the highest level since 2008.
Dalio’s comments come as a recent survey by Bank of America Global Research found that the majority of investment fund managers (83%) see slow growth and rising growth as the most likely outcome for the economy next year. Let’s expect inflation – aka stagflation. Also, about 73% of respondents expect a weak economy in the next 12 months, the lowest since the survey began in 1994.
Fox Business’ Megan Heaney contributed to this report.