Ray Dalio: Fed’s Inflation Fight Will Lead to Stagflation

Strategas CEO Jason Trennert discusses recession risk in the U.S., the Fed’s handling of inflation and the impact of the current economy on everyday Americans. As Federal Reserve Chairman Jerome Powell was grilled over runaway inflation Wednesday, Bridgewater Associates founder Ray Dalio is warning that the Central Bank’s efforts to tame scorching-hot inflation will likely lead to stagflation over the long term.  Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment. The phenomenon ravaged the U.S. economy in the 1970s and early 1980s, as spiking oil prices, rising unemployment and easy monetary policy pushed the consumer price index as high as 14.8% in 1980, forcing Fed policymakers to raise interest rates to nearly 20% that year.  Ray Dalio, billionaire and founder of Bridgewater Associates LP, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., on Wednesday, May 1, 2019. Photographer: Patrick T. Fallon/Bloomberg via Getty Images (Photographer: Patrick T. Fallon/Bloomberg via Getty Images)“I now hear it commonly said that inflation is the big problem so the Fed needs to tighten to fight inflation, which will make things good again once it gets inflation under control,” Dalio wrote in a LinkedIn post on Tuesday. “I believe this is both naïve and inconsistent with how the economic machine works. That’s because that view only focuses on inflation as the problem and it sees Fed tightening as a low-cost action that will make things better when inflation goes away, but it’s not like that.” The billionaire argues that while the Fed’s tightening reduces inflation because it results in consumers spending less, it also takes away their buying power.“The only way to raise living standards over the long term is to raise productivity and central banks don’t do that,” he added. GOLDMAN WARNS RECESSION RISKS NOW HIGHER AND ‘MORE FRONT-LOADED’In order to do its job effectively, Dalio believes that Fed should be focused on using its powers to “drive the markets and economy like a good driver drives a car—with gentle applications of the gas and brakes to produce steadiness rather than by hitting the gas hard and then hitting the brakes hard, leading to lurches forward and backward.” He also emphasized that the central bank needs to keep debt assets and liabilities “relatively stable” and not allow them to get too large to manage.  FILE — This May 4, 2021, file photo shows the Federal Reserve building in Washington. (AP Photo/Patrick Semansky, File) ((AP Photo/Patrick Semansky, File) / Associated Press)However, he points out that the Fed’s latest move from printing and buying debt at around $1.5 trillion annually to selling it at $1.1 trillion annually and sharply lowering and raising interest rates resulted in big lurches forward and backward. He also said it is “virtually impossible” for the Fed to push interest rates high enough to adequately compensate holders of debt assets for inflation without them being too high to support strong debtors, market …