US economy on the cusp of stagflation, warns the world’s largest hedge fund
The world’s largest hedge fund is sounding the alarm about a possible return to 1970s-style “stagflation”, as Federal Reserve moves to tame high inflation.
Bob Prince, chief investment officer at Bridgewater Associates, told Bloomberg TV this week that markets haven’t fully absorbed the shock of what’s happening in the economy and that investors are very optimistic about the trajectory of inflation and interest rates.
What is stagnation? Why do economists fear a 1970s-style catastrophe?
When asked if he thinks the economy is heading toward stagflation, Prince said, “We’re on the cusp of that, yes.”
Stagflation is a combination of economic Recession and high inflation are characterized by high consumer prices along with high unemployment. This phenomenon ravaged the American economy in the 1970s and early 1980s, as rising oil prices, rising unemployment, and easy monetary policy drove the CPI to 14.8% in 1980, forcing federal policymakers to raise interest rates to nearly 20% in that year. .
Prince said the economy is already facing “cash inflation” as a result of massive injections of fiscal stimulus from the federal government and the Federal Reserve during the pandemic that have been used to support American businesses and households.
“Markets underestimate the picture of inflation,” he said during the World Economic Forum in Davos, Switzerland. “Sustainability, and self-reinforcement of inflation are not insignificant. The degree of tightening over time is not excluded.”
Consumer prices jumped 8.3% in April on an annual basis, close to a 40-year high, and are expected to remain elevated in the coming months. As a result, the Fed embarked on its boldest course of policy tightening in decades, raising interest rates by half a point earlier this month, and indicating that increases of similar size are on the table at upcoming meetings.
There are growing fears that the Fed will cause a recession because raising interest rates tends to create higher rates on consumer and business loans, slowing the economy by forcing employers to cut back on spending. Bank of America, as well as Fannie Mae and Deutsche Bank, are among Wall Street Companies expect a downturn in the next two years.
Federal Reserve Chair Jerome Powell acknowledged that there could be some “pain associated with” lowering inflation and curbing demand, but dismissed the idea of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. However, he cautioned, a soft landing — the gentle point between cooling demand without crashing it and causing a recession — is not guaranteed.
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“It’s going to be hard and it’s not going to be easy,” Powell said during a recent meeting. “Nobody here thinks it’s going to be easy. However, we think there are ways… for us to get there.” Interview with Marketplace.