Ray Dalio Warns Fed Rate Cut In September Could Trigger Stagflation Risk

Billionaire investor Ray Dalio warned on Thursday that a September rate cut by the Federal Reserve, despite elevated inflation, could deepen risks of stagflation.

“I fear that short-term rates and the dollar will go down, especially relative to gold, long-term interest rates will rise a bit, so the yield curve will become steeper, and stocks will do relatively poorly despite the easing,” Dalio wrote during a Reddit AMA responding to a question about the impact of a Fed rate cut in September. He added that such a shift would signal investors wanting to rotate out of debt into alternative stores of wealth. Dailo said that the move would also indicate that the Fed is “in a bind” and that the risk of stagflation was rising.

The U.S. Dollar Index (DXY) has declined by more than 2% so far this year and by nearly 10% over the past 12 months. On Thursday afternoon, DXY was trading up 0.2% with retail sentiment on Stocktwits trending in ‘bullish’ territory over the past day. 

Meanwhile, the SPDR Gold Shares ETF (GLD) has gained 33% this year and more than 40% over the past 12 months. GLD edged 0.5% lower by Thursday afternoon, after hitting a record high of $329.45 in the previous session.

The broader equities market was trading in the green with the SPDR S&P 500 ETF (SPY) up 0.55%, the SPDR Dow Jones Industrial Average ETF (DIA) gaining 0.74%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) moving 0.62% higher. However, retail sentiment around QQQ on Stocktwits dipped to ‘extremely bearish’ from ‘bearish’ territory over the past day.

Answering a separate question on strategist Peter Zeihan’s view that China faces an inevitable collapse within the next decade, Dalio stated he wouldn't bet on it any more than he would bet on the United States' collapse over the next decade. “I think it's not smart to place that bet because they both have big strengths and big weaknesses. What I would bet on is these two powers having lots of big conflicts that I pray don't take the form of a military war, though I am confident they will continue to take the form of trade, economic, technological, capital, and geopolitical influence wars,” he said.

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