Ray Dalio: Is the Fed Inflating the Economy?

Ray Dalio's Harsh Criticism

World-renowned investor and founder of Bridgewater Associates Ray Dalio sharply criticized the U.S. Federal Reserve's (Fed) plan for balance sheet reduction (QT) and suggested that it would shift towards monetary expansion (QE). Fed Chairman Jerome Powell announced that the bank will end its balance sheet shrinking program on December 1 and indicated that it may resume asset purchases next year.

Current State of the Fed's Balance Sheet and Uncertain Future

Currently, the Fed's balance sheet is around $7 trillion. In his October remarks, Powell stated, "At some point, reserves will need to be gradually increased to keep pace with the size of the banking system and the economy." Dallas Fed President Lorie Logan also warned that if repo rates rise permanently, the Fed may need to move to asset purchases to ensure sufficient liquidity.

Dalio's Concerns and Recommendations

In a post on LinkedIn, Dalio emphasized: "If the Fed's balance sheet grows rapidly while interest rates are lowered and public spending continues to run large deficits, this could be interpreted as the Fed and Treasury financing public debt by printing money.” He noted that investors would perceive this situation as "the Fed inflating the market bubble."

Economic Outlook and Risks

Dalio highlighted that current monetary expansion policies, combined with strong private sector credit and low unemployment, could create bubbles in areas such as technology and artificial intelligence. Such periods typically correspond to times of excessive liquidity inflating markets, but where tightening has not yet begun. Dalio pointed out that like at the end of 1999 and in 2010-2011, "there may be selling opportunities for investors when these processes come to an end."