Stagflation Risk Warning: Warsh's Rate Cuts Will Severely Damage the Fed's Credibility
2026-04-28 19:33:07
Ray Dalio, founder of Bridgewater Associates, recently stated publicly that the US economy has officially entered a stagflation cycle, and issued a stern warning to Kevin Warsh, the Federal Reserve Chairman whom President Trump is pushing to succeed him: Under the current circumstances, any impulse to cut interest rates must be resolutely resisted, otherwise it will seriously damage the credibility of the Federal Reserve's policies.
In an interview with CNBC, Dalio emphasized that the current dual predicament of persistently high inflationary pressures and continued weakening economic growth momentum has severely limited policymakers' room for maneuver.
He clearly pointed out that "we are undoubtedly in a stagflation cycle. The core problem is that short-term inflationary pressures have risen significantly and the inflation level is far from the policy target range."
Dalio further warned that choosing to cut interest rates at this critical juncture would risk jeopardizing the Federal Reserve's policy authority.
He emphasized that "there is absolutely no possibility of an interest rate cut under the current circumstances. Such a move would inevitably damage the Federal Reserve's policy credibility and public trust, especially during this sensitive period in the market."
It is worth noting that Dalio's assessment is not an isolated viewpoint.
He analyzed that, looking at the monetary policy trends of major economies around the world, based on existing economic data, policymakers in various countries have no intention of cutting interest rates. This general consensus also confirms that the current macroeconomic environment simply does not have the basis for implementing easing policies.
This warning comes as Warsh's confirmation as the nomination of Federal Reserve Chairman enters a critical phase.
As a former Federal Reserve governor, Warsh is expected to succeed Jerome Powell as head of the Federal Reserve in mid-May, and this confirmation process has sent a clear signal that he intends to completely reshape the Fed's inflation governance framework.
At last week’s Senate Banking Committee hearing, Warsh bluntly pointed out that the Federal Reserve has not yet fully faced up to the series of policy mistakes it made during the pandemic.
Warsh stated, "The fact that prices rose by 25% to 35% across all income levels in the United States after the COVID-19 pandemic clearly demonstrates that the Federal Reserve failed to achieve its core policy objectives, and we are still bearing the consequences of the policy mistakes of 2021 and 2022."
Warsh called for a completely new inflation policy framework and has repeatedly advocated for reducing the size of the Federal Reserve's balance sheet, arguing that this would ultimately create a more relaxed financing environment for households and small and medium-sized enterprises and reduce actual borrowing costs.
This long-term policy orientation echoes Dalio's warnings about short-term risks—that cutting interest rates rashly before inflation is clearly under control would be tantamount to policy suicide.
Dalio's assessment of stagflation is being increasingly corroborated by the latest economic data.
The preliminary composite purchasing managers' index (PMI) for the G4 economies (US, Eurozone, Japan and UK) released by S&P Global in April showed that demand weakened for the first time since the end of 2023, dragged down by factors such as the continued escalation of the conflict in the Middle East, and output only achieved moderate growth.
At the same time, global supply chain tensions have intensified again: delivery delays in the four largest economies have reached their worst levels since 2022, and input costs in manufacturing and services are rising at their fastest pace in nearly three years.
S&P Global warned that these cost pressures are expected to be passed on to end-consumer prices in the coming months, pushing inflation significantly higher.
This economic landscape, characterized by both weak demand and rising prices, highlights the policy dilemma faced by central banks worldwide, including the Federal Reserve.
High inflation typically requires tighter monetary policy to curb aggregate demand, while sluggish economic growth necessitates looser policies to boost it. The unique characteristic of stagflation is that it simultaneously imposes these two contradictory policy pressures on policymakers.
Currently, market participants' expectations are highly consistent with Dalio's judgment.
According to the CME FedWatch Tool, traders expect a 100% probability that the Federal Reserve will keep interest rates unchanged at its meeting this week, and pricing in the federal funds rate futures market also indicates that the policy is most likely to remain unchanged for the remainder of 2026.
Morgan Stanley economists expect U.S. GDP to grow by 2.4% in the first quarter, while core personal consumption expenditure inflation is expected to reach 4.1% annually—a combination that further underscores the need for policy caution.
The bank's baseline scenario predicts that if inflation continues to slow, the Federal Reserve will keep interest rates stable for most of the year, only implementing moderate rate cuts in the second half of the year.
Meanwhile, Dalio offered his interpretation of the recent stock market performance: despite heightened geopolitical risks, strong corporate earnings have provided solid support for the stock market rebound.
He continued to recommend that investors allocate 5% to 15% of their portfolios to gold as a hedging tool, stating that in the current complex economic environment, gold remains one of the most effective risk diversification assets.
In an interview with CNBC, Dalio emphasized that the current dual predicament of persistently high inflationary pressures and continued weakening economic growth momentum has severely limited policymakers' room for maneuver.
He clearly pointed out that "we are undoubtedly in a stagflation cycle. The core problem is that short-term inflationary pressures have risen significantly and the inflation level is far from the policy target range."
Dalio further warned that choosing to cut interest rates at this critical juncture would risk jeopardizing the Federal Reserve's policy authority.
He emphasized that "there is absolutely no possibility of an interest rate cut under the current circumstances. Such a move would inevitably damage the Federal Reserve's policy credibility and public trust, especially during this sensitive period in the market."
Global consensus: Without a basis for easing, central banks around the world have no intention of cutting interest rates.
It is worth noting that Dalio's assessment is not an isolated viewpoint.
He analyzed that, looking at the monetary policy trends of major economies around the world, based on existing economic data, policymakers in various countries have no intention of cutting interest rates. This general consensus also confirms that the current macroeconomic environment simply does not have the basis for implementing easing policies.
Warsh's policy vision: Reshaping the inflation framework and quantitative tightening orientation
This warning comes as Warsh's confirmation as the nomination of Federal Reserve Chairman enters a critical phase.
As a former Federal Reserve governor, Warsh is expected to succeed Jerome Powell as head of the Federal Reserve in mid-May, and this confirmation process has sent a clear signal that he intends to completely reshape the Fed's inflation governance framework.
At last week’s Senate Banking Committee hearing, Warsh bluntly pointed out that the Federal Reserve has not yet fully faced up to the series of policy mistakes it made during the pandemic.
Warsh stated, "The fact that prices rose by 25% to 35% across all income levels in the United States after the COVID-19 pandemic clearly demonstrates that the Federal Reserve failed to achieve its core policy objectives, and we are still bearing the consequences of the policy mistakes of 2021 and 2022."
Warsh called for a completely new inflation policy framework and has repeatedly advocated for reducing the size of the Federal Reserve's balance sheet, arguing that this would ultimately create a more relaxed financing environment for households and small and medium-sized enterprises and reduce actual borrowing costs.
This long-term policy orientation echoes Dalio's warnings about short-term risks—that cutting interest rates rashly before inflation is clearly under control would be tantamount to policy suicide.
Data confirms: Stagflation is worsening, and the central bank is caught in a policy dilemma.
Dalio's assessment of stagflation is being increasingly corroborated by the latest economic data.
The preliminary composite purchasing managers' index (PMI) for the G4 economies (US, Eurozone, Japan and UK) released by S&P Global in April showed that demand weakened for the first time since the end of 2023, dragged down by factors such as the continued escalation of the conflict in the Middle East, and output only achieved moderate growth.
At the same time, global supply chain tensions have intensified again: delivery delays in the four largest economies have reached their worst levels since 2022, and input costs in manufacturing and services are rising at their fastest pace in nearly three years.
S&P Global warned that these cost pressures are expected to be passed on to end-consumer prices in the coming months, pushing inflation significantly higher.
This economic landscape, characterized by both weak demand and rising prices, highlights the policy dilemma faced by central banks worldwide, including the Federal Reserve.
High inflation typically requires tighter monetary policy to curb aggregate demand, while sluggish economic growth necessitates looser policies to boost it. The unique characteristic of stagflation is that it simultaneously imposes these two contradictory policy pressures on policymakers.
Market and institutional consensus: The Federal Reserve is highly likely to maintain stable interest rates.
Currently, market participants' expectations are highly consistent with Dalio's judgment.
According to the CME FedWatch Tool, traders expect a 100% probability that the Federal Reserve will keep interest rates unchanged at its meeting this week, and pricing in the federal funds rate futures market also indicates that the policy is most likely to remain unchanged for the remainder of 2026.
Morgan Stanley economists expect U.S. GDP to grow by 2.4% in the first quarter, while core personal consumption expenditure inflation is expected to reach 4.1% annually—a combination that further underscores the need for policy caution.
The bank's baseline scenario predicts that if inflation continues to slow, the Federal Reserve will keep interest rates stable for most of the year, only implementing moderate rate cuts in the second half of the year.
Investment advice: Dalio strongly recommends gold as a hedging asset.
Meanwhile, Dalio offered his interpretation of the recent stock market performance: despite heightened geopolitical risks, strong corporate earnings have provided solid support for the stock market rebound.
He continued to recommend that investors allocate 5% to 15% of their portfolios to gold as a hedging tool, stating that in the current complex economic environment, gold remains one of the most effective risk diversification assets.
- Risk Warning and Disclaimer
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