Bridgewater Associates
- The inflation threat isn't over and interest rates won't sink overnight, Bridgewater's co-CIO says.
- Karen Karniol-Tambour sees little reason for rate cuts with a strong economy and sticky inflation.
- The Federal Reserve's rate hikes are still working through the system, she says.
Investors wagering that inflation is history and interest rates will plummet are likely to be disappointed, warned the co-chief investor of the world's biggest hedge fund.
Inflation has slowed from a 40-year high of 9.1% last summer to below 4% in recent months, but prices are still rising at nearly double the Federal Reserve's target of 2% a year. The central bank has hiked rates from almost zero to more than 5% in the past 18 months or so, but economic growth and employment have remained strong.
The lingering threat of inflation, and the economy's surprising resilience, make it improbable that the Fed will suddenly reverse course and start slashing rates, Bridgewater Associates' Karen Karniol-Tambour said in a recent episode of "Bloomberg Wealth with David Rubenstein."
"When you look at what it takes to get fast rate declines, usually you need the economy collapsing pretty quickly," she said, noting the Fed usually only cuts rates aggressively if it needs to shore up growth or limit the fallout from a disaster.
"That's very far from where we are today," she continued, adding that "inflation is still uncomfortably high."
Indeed, the Fed may realize that inflation isn't fading, and markets are pricing in rate cuts that it's uncomfortable making, Karniol-Tambour said.
Fed Chair Jerome Powell and his colleagues might find themselves lifting rates even higher to get rid of stubborn inflation, as opposed to lowering them, she added.
Even so, bond investors are pricing in a "pretty good number of rate cuts" starting next year, Karniol-Tambour said. They may be wagering the Fed's rate hikes so far are taking effect with a lag.
"There's been a delay in fully reaching the economy and markets with some of that tightening that's occurred," she said, suggesting that financial markets could be particularly hard hit.
"Will that be enough to actually upset the apple cart to be seen? I think probably not, but maybe."
Bridgewater's billionaire founder, Ray Dalio, has gradually stepped back from controlling his firm in recent years. CEO Nir Bar Dea and co-CIOs Karniol-Tambour, Greg Jensen, and Bob Prince now run the show.