Dalio’s Warning to Yellen: Don’t Repeat 1937

Bridgewater Associates founder Ray Dalio has added his voice to those warning the Federal Reserve against raising interest rates too soon.

Fed Chair Janet Yellen is to speak later today following the Federal Open Market Committee’s two-day meeting, and speculation is mounting as to when the 12-strong committee will decide to lift the base interest rate from 0.25%, where it has remained since late 2008.

“We don’t know—nor does the Fed know—exactly how much tightening will knock over the apple cart.” —Ray Dalio, BridgewaterIn a letter to investors, Dalio warned that raising rates too soon risked a repeat of 1937, when the Fed hiked rates as the US economy was recovering from an economic depression. The shock move sent markets plummeting and, many argue, extended the US recession.

“We don’t know—nor does the Fed know—exactly how much tightening will knock over the apple cart,” Dalio wrote in the letter, also signed by Mark Dinner, a senior investment associate at Bridgewater. “We think it would be best for the Fed to err on the side of being later and more delicate than normal.”

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The pair said the Fed had “created expectations that it will tighten in either June or September and such expectations are difficult to deviate from.” Dalio and Dinner said they were “cautious” about exposures with a rate hike on the horizon.

“The financial system has become increasingly vulnerable only six years after its last collapse.” —Bill Gross, Janus CapitalA monthly survey of fund managers by Bank of America Merrill Lynch showed sentiment towards the US had fallen to its lowest level since the survey began, as attention turned to the Fed’s plans.

Janus Capital’s Bill Gross urged investors to “stay conservative” in his latest investment note.

“In an attempt to elevate returns, investors and savers do all the wrong things required of a stable capitalistic model,” he said. “The financial system has become increasingly vulnerable only six years after its last collapse in 2009.”