- Ray Dalio predicted the Fed would hike interest rates to at least 4.5% to curb stubborn inflation.
- The billionaire investor estimated the rate increases would spark a 20% decline in stock prices.
Ray Dalio expects the US to face stubborn inflation and interest rates of at least 4.5% in the years ahead, and forecasts a roughly 20% plunge in stock prices.
"My guesstimate is that it will be around 4.5% to 5% long term," he wrote, referring to inflation, in a LinkedIn post on Wednesday.
The rate of price increases could be "significantly higher" if there are any shocks, such as economic crises in Europe and Asia or droughts and floods, he added.
The Consumer Price Index report this week showed that core CPI rose by 0.6% in August, or 7.4% on an annualized basis. Dalio predicted US inflation would slow slightly in the coming months, as previous shocks such as the spike in energy prices fades, then trend higher in the medium term.
The Bridgewater Associates founder said the Federal Reserve will seek to curb inflation by hiking interest rates from around 2.5% today, to between 4.5% and 6% over time.
The US government needs to sell a bunch of debt to fund its budget deficit, and the Fed is selling bonds to pull money out of the economy, he noted. That means rates have to rise to a level where demand for private credit will fall, and create enough buyers for those bonds.
Dalio predicted the interest rate hikes will erode disposable incomes, and drag down asset prices to reflect their relatively lower returns versus bonds and savings accounts.
"I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices," he said, adding that longer-duration assets could plunge even more.
The investor said the Fed's rate hikes will likely cause a major recession. But it will probably be delayed until Americans exhaust their robust amounts of cash and wealth, and they're forced to cut back on spending.
"The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be, that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects," Dalio concluded.