Bridgewater's Dalio: A 25-Basis Point Hike Doesn't Worry Me, the Next Downturn Does

Sep 17 2015 | 11:21am ET

Although he doesn’t see much reason for it, Bridgewater’s Ray Dalio is ambivalent about a potential 25-basis point rise in interest rates this afternoon, according to an interview on Bloomberg Wednesday.

Instead, he is much more concerned about the effectiveness of monetary policy during the next economic downturn. “I don't care whether it moves along the curve. What scares me, or what worries me, is what the next downturn in the economy looks like, with asset prices where they are,” Dalio said. “We have a very limited capacity of central banks to be effective in easing monetary policy.”

The U.S. Federal Reserve wraps up its September meeting later today and will decide whether to finally embark on a normalization of U.S. interest rate policy, which has been essentially stuck at zero since the financial crisis. Many prominent hedge fund managers, including bond maven Jeff Gundlach of DoubleLine Capital, have stressed the weak global economic environment and absence of inflation as reasons why the FOMC should stand pat for now. 

For his part, Dalio, whose Bridgewater Associates manages more than $154 billion in capital and is the world’s largest hedge fund, believes a hike today risks a downturn and the Fed’s next big move may be additional quantitative easing (although he doesn’t believe it will work nearly as well). Others have repeatedly commented a move would be premature and actually risks being unwound in relatively short order if economic conditions do not improve. 

On the other hand, several Fed governors have spent the last several months prepping the market for an eventual rate hike, citing U.S. economic growth and low unemployment as grounds to finally move away from zero-interest-rate policy (known as ZIRP) that affords very little flexibility going forward. Should the Fed boost rates, it will be the lone developed-nation central bank to embark on a tightening path. 

As for the pace of any Fed tightening, Dalio said he didn’t believe the Fed would move faster than what is implied on the interest rate curve. “That interest rate curve - in other words the rate at which it's discounted to rise, which is built into the curve - is built into all asset prices.  And if you raise them much more than is discounted in the curve, I think that's going to cause asset prices to go down.”

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