Bob Prince, co-CIO at Bridgewater Associates, said Tuesday the U.S. economy is in "kind of a stagflation environment" — as the country faces high inflation and low growth rates — and the Federal Reserve must tighten monetary policy to break out of it.
"You have to tighten first to make the economy weak to bring down inflation," Mr. Prince said at a Council of Institutional Investors conference. "And it hasn't been enough yet."
In February, data from the Bureau of Labor Statistics showed the consumer price index rose 6.4% in January on an annual basis, down slightly from 6.5% in December. This is a major shift from when the annualized CPI figure was at 9.1% in June, a 40-year high.
The Federal Open Market Committee raised the federal funds rate a quarter-point to a range of 4.5% to 4.75% after its Jan. 31-Feb. 1 meeting. This followed a 50-basis-point increase at the committee's previous meeting in December and four 75-basis-point hikes at each preceding meeting.
When asked about his thoughts as many brace for a potential recession, Mr. Prince said, "It's very unusual that everybody expects a recession."
In this case, "the degree of monetary tightening has been enough to cause a downturn, (but) it hasn't happened yet, which is a really interesting phenomenon," he added.
Mr. Prince attributed this phenomenon to high nominal spending, which he said needs to decrease.
"I think the key kind of inflection point to turn that process is a contraction in corporate profits," he added.
"You need about a 20% drop in profits to induce contraction in labor markets, to bring wages down, to bring inflation down," Mr. Prince said. "And we haven't gotten that yet."
The FOMC's next meeting is March 21-22.
