Dalio’s Magic Number for Tanking the Economy

What will it take for the Federal Reserve to contract the economy, in the central bank’s quest to conquer high inflation? Ray Dalio, the founder of hedge fund colossus Bridgewater Associates, has a number: a federal funds rate of 4.5% to 6%.

The billionaire Wall Street kingpin wrote in a LinkedIn post that “interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range).” Such a hike “will bring private sector credit growth down, which will bring private sector spending and, hence, the economy, down with it.” Collateral damage: The already suffering stock market would lose another 20%, he opined.

Dalio indicated that he expects “that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down.”

Right now, the benchmark Fed rate is in a band from 2.25% to 2.50%. Inflation has fallen a bit, but still is torrid, with the Consumer Price Index rising 8.3% in August on an annual basis, just a small dip from the month before. Wall Street had hoped for inflation to drop more, and the August CPI news, released earlier this week, sent the market plummeting: The S&P 500 fell 4.3% on Tuesday, its worst day since June. Thus far this year, the index has fallen 18%.

The futures market believes that the benchmark rate will hit Dalio’s 4.5% level by the March 2023 Fed policymaking committee meeting. The betting is that next Wednesday’s Fed session will bring a 0.75 percentage point hike in the rate, to a range of 3.0% to 3.25%.

Some think that the central bank could boost its federal funds rate a full percentage point next week, but the overall Wall Street consensus doesn’t buy that prediction. “Good drivers don’t increase their speed as they get closer to their destination,” remarked Michael Feroli, chief U.S. economist at JPMorgan, in a note to clients.

Dalio’s downbeat take is echoed by strategists who expect that that the stock market will suffer some more as bad news continues. Gene Goldman, CIO of Cetera Investment Management, contended in a statement that market volatility will persist as investors try to predict future economic indicators and the Fed’s response.

In the view of Bank of America Securities, the “risks of a hard landing are rising. This will likely come through projections that show less growth, higher unemployment and a more restrictive policy rate stance.”

The pace of negative economic news is the key, according to Bill Adams, chief economist for Comerica Bank. After the September Fed meeting, he said in a note, the central bank’s actions “will depend on how quickly a softer economy translates into a softer labor market. So far this process has been quite gradual, with the unemployment rate up just two tenths of a percent after returning to a half-century low in July.”