Ray Dalio Says Stagflation Pain Will Force Central Banks Into a U-Turn on Rate Hikes: Report

Ray Dalio speaks onstage during TechCrunch Disrupt San Francisco 2019 at Moscone Convention Center in San Francisco, on Oct. 02, 2019. (Kimberly White/Getty Images for TechCrunch)

Renowned investor Ray Dalio told an Australian newspaper in a recent interview that he thinks central banks across the world will be forced to reverse their current paths of monetary tightening and cut rates in 2024 after their economies suffer from stagflation.

Dalio, the billionaire founder of Bridgewater Associates LP, told the Australian Financial Review in an interview published June 8 that stagflation—the toxic combination of sluggish growth and high inflation—would follow the current bout of central bank rate hikes.

“It is a structural inflation situation that is going to produce stagflation,” Dalio told the outlet.

Soaring inflation, which in the United States has been running at a 40-year high, has forced central bankers around the world to reverse the ultra-loose monetary settings that accompanied other pandemic-era stimulus measures.

While many policymakers initially believed inflation would be a temporary phenomenon, it has proven stubbornly persistent, buoyed by factors like supply chain dislocations, a sharp post-pandemic rebound in consumer demand, and soaring energy costs.

“We believe that we are in a tightening mode that can cause corrections or downward moves to many financial assets,” Dalio told the outlet.

“The pain of that will become great and that will force the central banks to ease again probably somewhere close to the next presidential elections in 2024,” he said, referring to the upcoming presidential elections in the United States.

Dalio’s dire stagflationary warning lines up with a recent World Bank forecast of a growing risk of stagflation and recession.

The global economy is “entering what could become a protracted period of feeble growth and elevated inflation,” the World Bank said in a statement that accompanied the release of its latest Global Economic Prospects report.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank President David Malpass said in a statement, adding that there’s an “urgent” need to encourage production and not to impose trade restrictions in order to avoid the worst.

The World Bank’s economic outlook report also includes an assessment of how current global economic conditions stack up against the stagflation of the 1970s.

The current situation is similar to the prior stagflationary period in three key ways, the World Bank said, noting “persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.”

Differences from the 1970s include a strong dollar, smaller increases in commodity prices, and stronger balance sheets of major financial institutions.

While the World Bank expects global inflation to soften next year, it will likely stay above target in many economies.

“If inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn along with financial crises in some emerging market and developing economies,” the World Bank warned.

The international agency downgraded its global growth forecast for 2022, predicting that the global economy will expand 2.9 percent this year, down 1.2 percentage points from the 4.1 percent pace it forecast back in January.