Ray Dalio’s Bridgewater Associates — the world’s largest hedge fund — has adopted a cautious forecast on the global economy, and co-CIO Greg Jensen is expecting a downturn.
Jensen expects inflation will ramp up pressure on the Federal Reserve to hike interest rates beyond what many on Wall Street expect. But the central bank will still tolerate inflation above its 2% target because policymakers won’t be able to stomach a brutal stock sell-off, he added. The latest reading on consumer prices showed inflation remains above 8%.
If the Fed actually committed to bringing inflation down to its 2% goal, stocks could crash 25% from current levels, as tightening would have to become more aggressive, which “would then crack the economy and probably crack the weaker [companies] in the economy,” he said.
Slowing the economic expansion to rein in high prices will require extreme hawkishness from the Fed, which Jensen said will drain liquidity from financial markets.