MW Ray Dalio is back with a fresh warning, and it's about the Fed's new policy

By Steve Goldstein

Legendary hedge-fund chieftain says Fed's plan could be more dangerous and inflationary

Ray Dalio warns that a new policy at the Fed could stoke a bubble.

"Did you see the Fed's announcement that it will stop QT and begin QE," asks legendary investor Ray Dalio, the founder of Bridgewater Associates, a provocative, and arguably false, characterization of what the Fed is doing.

He is right that the Fed will stop its quantitative tightening program of reducing the size of its balance sheet, now nearly $7 trillion, on Dec. 1.

Chair Jerome Powell did tell CNBC's Steve Liesman at October's post-decision press conference that the Fed could start adding assets next year. "At a certain point, you'll want to start - you'll want to start reserves to start gradually growing to keep up with the size of the banking system and the size of the economy," said Powell. Dallas Fed President Lorie Logan, an expert on money-market mechanics, said something similar. "If the recent rise in repo rates turns out not to be temporary, the Fed in my view would need to begin buying assets to keep reserves from falling further and maintain an ample supply of reserves," she said in a speech.

Now, would the Fed buying bonds to manage the rate at which it lends to commercial banks be called QE? Is that from the French region Quantitative du Easing? The Fed and other central banks would say no, but it might be hard to tell the difference. Evercore's Marco Casiraghi has a new analysis saying the Fed might have to buy up to $50 billion of assets a month in the first quarter, and even though those purchases would likely come in Treasury bills, it could indirectly dampen long-term yields since the Treasury is not going to increase issuance of notes and bonds.

The potential for big purchases is what has Dalio on edge.

"More specifically, if the balance sheet starts expanding significantly, while interest rates are being cut, while the fiscal deficits are large, we will view that as a classic monetary and fiscal interaction of the Fed and the Treasury to monetize government debt," says Dalio in a LinkedIn post. And if that happens when private credit and capital-market credit creation are strong, stocks are at highs, credit spreads and unemployment are near lows, inflation is still highs and AI stocks are in a bubble, "it will look to me like the Fed is stimulating into a bubble."

He offered a table showing previous stimulus episodes to contrast just how different the current situation is.

"That's what makes what is happening different in ways that seem to make it more dangerous and more inflationary. This looks like a bold and dangerous big bet on growth, especially AI growth, financed through very liberal looseness in fiscal policies, monetary policies, and regulatory policies that we will have to monitor closely to navigate well," he said.

So what could happen?

"All else being equal, the Fed's increased QE should be expected to lower real interest rates and increase liquidity by compressing risk premia, pushing real yields down and pushing P/E multiples up, and especially boosting valuations of long-duration assets (such as tech, AI, growth) and inflation hedge assets such as gold and inflation indexed bonds. Tangible asset companies like miners, infrastructure, real assets would likely outperform over pure long-duration tech once inflation risk re-awakens," he says.

That doesn't sound too bad, until it is. "It would be reasonable to expect that, similar to late 1999 or 2010-2011, there would be a strong liquidity melt-up that will eventually become too risky and will have to be restrained. During that melt-up and just before the tightening that is enough to rein in inflation that will pop the bubble is classically the ideal time to sell," said Dalio.

The market

U.S. stock-market futures were steady after a 0.4% rise for the S&P 500 SPX and a strong 1.5% gain for the small-cap Russell 2000 RUT on Wednesday. Oil (CL00) was back above $60 as the U.S. dollar index DXY returned below 100.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6796.29    -1.37%  0.63%   15.55%   14.63% 
   Nasdaq Composite                                                     23,499.80  -1.91%  1.98%   21.69%   23.79% 
   10-year Treasury                                                     4.14       4.10    -0.40   -43.60   -20.20 
   Gold                                                                 4018.6     -0.49%  0.69%   52.26%   48.07% 
   Oil                                                                  60.06      -0.38%  -2.37%  -16.43%  -16.80% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

After the close of trade, Tesla $(TSLA)$ will ask shareholders to approve a compensation plan for Elon Musk that could reward the chief executive with as much as $1 trillion.

New York Fed President John Williams is due to speak at 11 a.m., one of several Fed officials expected to hit the tape on Thursday.

Marvell Technology shares $(MRVL)$ jumped after a Bloomberg report that SoftBank considered buying the U.S. chipmaker to then merge with ARM, in deal talks that at the moment aren't active. ARM $(ARM)$ separately on Wednesday reported its third consecutive quarter of more than $1 billion in revenue.

Elf Beauty stock $(ELF)$ tumbled on lower-than-expected earnings and a weaker outlook.

Best of the web

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The chart

Not all bond hedges are created equally. This chart from Mark Rzepcznski of the Disciplined Systematic Global Macro blog shows that, this year, there's a positive correlation between the 30-year Treasury and the S&P 500, while for other maturities it's negative. For hedging purposes, it's better when stocks move in the opposite direction to stocks. "When the yield curve changes shape, likely due to a revision in monetary policy, there will be a dislocation in correlation co-movement," he writes. "We expect that these will converge in 2026 as the Fed stabilizes its monetary policy."

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   GME     GameStop 
   META    Meta Platforms 
   TSM     Taiwan Semiconductor Manufacturing Co. 
   AMZN    Amazon.com 
   AAPL    Apple 
   NIO     Nio 

Random reads

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-Steve Goldstein

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November 06, 2025 06:45 ET (11:45 GMT)

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