Hedge Funder Dalio Thinks the Fed Can Repeat 1937 All Over Again

Dalio Note Asks If Fed Should Be 'More Delicate'

Ray Dalio, founder of the world’s largest hedge fund firm, Bridgewater Associates, told investors there’s a risk that the Federal Reserve could create a market rout similar to that of 1937 if it raises interest rates too fast.

The Fed has signaled that rates will rise in June or September, and it would be difficult for policy makers not to deliver, Dalio and Mark Dinner wrote in a note to clients dated March 11. Given Bridgewater’s belief that “the same things happen over and over again,” the $165 billion Westport, Connecticut-based firm doesn’t want to have concentrated bets, according to the note, a copy of which was obtained by Bloomberg News.

“We don’t know -- nor does the Fed know -- exactly how much tightening will knock over the apple cart,” Dalio and Dinner wrote. “We think it would be best for the Fed to err on the side of being later and more delicate than normal.”

Dalio joins Jeffrey Gundlach in warning that the Fed runs the risk of having to reverse course if it raises interest rates too aggressively. Gundlach, the co-founder of DoubleLine Capital, this month called the Fed “a blockhead” for not learning from errors made by global counterparts, which raised rates too soon and then had to cut them.

Historical Comparison

Bridgewater in the note drew comparisons between recent years and those leading up to 1937. In both periods, interest rates had fallen to zero, stimulative monetary policy fueled a rally in asset prices and the U.S. economy rebounded, according to the note.

When the Fed started to tighten monetary policy in several steps, bonds sold off and the stock market slumped by more than 50 percent from a peak in 1937 through March of 1938, prompting the Fed to reverse course, Bridgewater wrote.

ValueWalk first reported the contents of the Bridgewater note yesterday.

Fed officials are meeting this week to discuss the timing of an interest-rate increase with the odds of a boost by September at 55 percent, futures contracts show. The central bank, which has held its benchmark at close to zero since 2008, may use its Wednesday statement to end or alter its pledge to be “patient” about raising borrowing costs.

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