Bridgewater Chief Investment Officer (CIO), one of the world’s largest hedge funds, Bob Prince warned that the fight against inflation is far from over and it will be very difficult to reduce core inflation.
The investment manager of Bridgewater, one of the world’s largest hedge funds, warned that the US’s fight against inflation is far from over and said it was premature to speculate that the Fed will make a series of rapid rate cuts next year.
Comments from Bridgewater Associates Chief Investment Officer Bob Prince took a cold shower on the global rally in stocks and bonds this week, fueled by relief from data showing annual U.S. inflation has fallen to its lowest level in more than two years.
Fed won’t cut as early as expected
The investment chief of the investment company that manages $125 billion said it was wrong for the markets to assume that the Fed will ease monetary policy soon, saying, “The Fed will not cut. They will not do what is priced in.”
Pricing in the futures markets shows investors are expecting another 0.25 percentage point increase from the Fed’s current target range of 5 to 5.25 percent by fall. In the next 12 months, they expect the Central Bank to reverse course and cut borrowing costs six times to about 3.8 percent by November 2024.
Investors increased their pricing for interest rate cuts after this week’s inflation figures. But while headline inflation fell sharply, core inflation, which does not include the volatile food and energy sectors and is closely watched by the Fed, fell more slowly to 4.8 percent. The core inflation rate is particularly well above the Fed’s 2 percent target.
Worst-case scenario for inflation, jump in energy prices
“Inflation has dropped but is still very high. It will probably stabilize at this level and we will be stuck around this inflation rate for a while. The biggest risk right now is that we will see a jump in energy prices while wages are still strong, which could lead to a rebound in inflation,” Prince said. .
Prince, who oversees assets with the Connecticut-based company’s co-CIOs Karen Karniol-Tambour and Greg Jensen, said core inflation is likely to be between 3.5 and 4 percent, pushing the Fed to tighten monetary policy further this week, pushing U.S. stocks down more than a year. He said he believes it will disappoint investors who have hit a long-term high.
This tightening “could take the form of keeping high interest rates steady despite expectations of cuts,” he said.
Expectations that the Fed will soon end its historic tightening cycle have helped boost market optimism throughout the year. The two major U.S. stock indexes – the benchmark S&P 500 and the tech-heavy Nasdaq Composite – had climbed 16.5 percent and 33 percent, respectively, out of bear market territory this year.
“Cash is an attractive alternative right now”
Despite this, Prince said that “it’s not usually a good environment to hold assets in bonds or stocks,” noting that cash is an attractive alternative at the moment.
The company’s investment chief said Bridgewater is “positioned for a tightening cycle”, which means taking a cautious stance on riskier asset classes.
Prince said the Fed will have to keep rates higher for longer, partly because the fight against inflation is hampered by a strong labor market.
Fiscal and monetary programs in the early days of the COVID-19 pandemic helped boost household savings, but tightened the labor market enough to allow wages to rise significantly. This meant that US consumers had higher incomes, allowing them to continue to absorb price increases.
“Current spending levels are financed by income, not credit expansion. So it’s going to be really hard to bring inflation down,” Prince said.