The founder of the world’s largest hedge fund is warning that an anticipated interest rate increase by the Federal Reserve later this year could take a bite out of the economic recovery, saying it could “knock over the apple cart.” “Clearly the Fed has created expectations that it will tighten in either June or September and such expectations are difficult to deviate from,” Ray Dalio, founder of Bridgewater Associates, and colleague Mark Dinner said in a March 11 note to investors.
“For those reasons, we expect a Fed tightening and are cautious about our exposures. To help convey why we are cautious, I’d like to remind you of the 1937 analog,” they wrote. The Fed raised interest rates in 1937 after a series of programs to fight the Depression, and an economic downturn followed.
Dalio’s note, which was reported by the Financial Times, said it would be best for the Fed to “err on the side of being later and more delicate than normal” in its approach to a tightening. “We don’t know – nor does the Fed know – exactly how much tightening will knock over the apple cart,” he said. “What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over.”