Ray Dalio thinks the Fed will raise interest rates soon — but history tells us that it may be too soon.
On Wednesday afternoon, the Federal Open Market Committee will release its monetary policy statement, and the market is focused on whether it will drop language indicating that it “can be patient in beginning to normalize” monetary policy by raising interest rates.
In a note last week, Dalio, the founder of hedge fund Bridgewater Associates, wrote that the economy today is eerily similar to 1937. The Fed raised rates eight years after the 1929 financial crisis, following accommodative monetary policy to boost the economy, and it still ended up being too soon. The Dow lost half of its value between the 1937 and 1938.
“If one agrees that either a) we are near the end of the developed country central bankers’ ability to be effective in stimulating money and credit growth or b) the dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening.”
He lists six market conditions around the 1929 financial crisis that mirror the most recent one (the follow is quoted directly from Dalio):
- Debt limits reached at Bubble Top, causing the economy and markets to peak (1929 & 2007).
- Interest rates hit zero amid depression (1931 & 2008).
- Money printing starts, kicking off a beautiful deleveraging (1933 & 2009).
- The stock market and “risky assets” rally (1933-1936 & 2009-2014).
- The economy improves during a cyclical recovery (1933-1936 & 2009-2014).
- The central bank tightens, resulting in a self-reinforcing downturn (1935 & 2015?)