Billionaire investor Ray Dalio is more worried about reducing stimulus than tackling inflation - and expects jumpy investors and political tensions to make it tricky

• Ray Dalio is more concerned about reducing stimulus than rising inflation.
• The Bridgewater Associates boss expects the Federal Reserve to struggle to sell government bonds.
• Dalio predicts that sensitive investors and political tensions will make tapering stimulus tougher.

Billionaire investor Ray Dalio is much more worried about how the Federal Reserve will taper its stimulus efforts than he is about rising inflation, he said in a Bloomberg interview at the Qatar Economic Forum this week.

Dalio, the cofounder and investment co-chief at Bridgewater Associates, acknowledged that demand is likely to surge as the pandemic threat recedes, boosting prices significantly. However, the bigger problem in his view is how the Fed will sell the government bonds it has amassed when their real returns are negative, buyers' portfolios are already overweighted towards US bonds, and other markets are offering better yields.

"It's likely that the Federal Reserve will not be able to taper or cut back, and might actually have to increase [stimulus] to prevent interest rates from going up," he told Bloomberg.

Skittish investors could also make it tricky for the Fed to temper its support as well, Dalio said. "You saw the reaction in the markets when the Fed just even hinted at tightening," he said. "I don't think they can tighten a lot without having a big negative effect."

The hedge fund manager also expressed concern about the huge volume of liquidity in markets being fueled by government stimulus and near-zero rates. He argued it was creating asset bubbles and threatening to lift inflation and weaken the dollar.

"There's a lot of money being thrown around," he said, giving the example of interest-only mortgages in the US.

As a result, the Bridgewater chief recognizes the need to slow the US economy, but warned that won't be as simple as it sounds.

"It's easy to say that the Fed should tighten, and I think that they should put on the brakes a little bit," he said. Yet when markets and the economy are this sensitive, the "slightest touching on those brakes has the effect of [spooking] markets because of where they're priced, and also passing through to the economy," he added.

The Fed is also operating in a politically charged environment in which the wealth gap and other issues are front and center, Dalio said. That makes it a tricky balancing act to not overheat the economy, foster asset bubbles, or drive up inflation, while not devaluing the dollar, terrifying investors, or running into political trouble either, he added.