Ray Dalio, the billionaire founder of Bridgewater Associates - the world's largest hedge fund, has predicted that equity markets can plunge by nearly 20 percent if the Federal Reserve increases policy rates to about 4.5 percent.
Dalio's warning came close on the heels of the US markets suffering a record slump after a higher-than-expected inflation print that fuelled the worry that the Fed may continue to raise rates to bring down consumer prices.
In a LinkedIn post, the founder of Bridgewater Associates highlighted that the economy is destined to go down as private sector credit depresses and private spending falls.
"Right now, the markets are discounting inflation over the next 10 years of 2.6 percent in the US. My guesstimate is that it will be around 4.5 percent to 5 percent long term, barring shocks," he wrote.
The popular hedge fund manager further noted that the US yield curve will be relatively flat until there is an unacceptable negative effect on the economy.
"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 (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected," he wrote.
The Fed has already raised the borrowing costs faster this year than at any time since the 1980s and a third straight 75-basis-point interest rate hike is expected next week, taking its current 2.25-2.5 percent policy rate range to 3-3.25 percent.
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