U.S. stocks will make a new low as the Federal Reserve lifts rates further to fix inflation, says Ray Dalio. He’s the Founder of Bridgewater Associates – the world’s largest hedge fund.
Rates to go up significantly from here
The dingy forecast arrives only days after the Bureau of Labour Statistics said consumer prices were up 0.1% in August (month-over-month). Read the full report here.
Consequently, Dalio says, the central bank will have to raise rates to the range of 4.5% to 6.0%.
It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6.0% range. I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices.
The benchmark S&P 500 index is already down about 8.0% from its recent high.
What to expect from the FOMC next week?
After the hotter-than-expected reading this week, it’s almost certain that the FOMC will go with another 75-bps hike on September 21st. Some, however, now warn of a full percentage point as well.
Elaborating further on the impact of higher rates on the economy, Dalio wrote in a LinkedIn article:
This will bring private sector credit growth down, which will bring private sector spending, and hence, the economy down with it.
The U.S. economy has already had two consecutive quarters of negative GDP. Dalio expects the annual inflation rate to sit between 4.5% and 5.0% over the next decade.