In a dismal forecast, founder of Bridgewater Associates Ray Dalio wrote that interest rates will need to rise into the 4.5% to 6% range in order to truly combat inflation, which will drag private sector credit growth, spending and the entire economy down. He made the prediction in a LinkedIn piece that is cited in a Bloomberg article.
Even just increasing rates to 4.5% would result in equity prices plummeting 20%, Dalio said. Traders have been expecting the Fed’s rate increases to peak at 4.4% in 2023, and the market indicates that they have fully factored in a 75-basis-point increase. But Dalio believes that some investors might still be dragging their feet on long-term inflation, and not willing to face the possibility of elevated inflation of 4.5% to 5% for the next decade. It could even be “significantly higher,” he wrote, if the economy continues to deliver shocks such as the Ukraine war and supply-chain disruptions.
Meanwhile, the U.S. yield curve will stay flat, and the intensifying inversion of major curve measures is creating more negative sentiment among investors, who see it as a sign of a looming recession, Bloomberg reports. Because many investors believe that the Fed will push the economy into a recession in 2023, that leads them to think that policy makers will start to ease rates in the second half of next year. All told, Treasuries are experiencing the biggest hit they’ve taken in decades, and the S&P 500 is on track to have its worst annual loss since 2008.