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Bridgewater's Dalio says Fed will ease, not tighten

While markets look for signs of when the Federal Reserve will tighten monetary policy, hedge fund manager Ray Dalio believes the central bank could resort to easing.

The Fed could loosen monetary policy through quantitative easing rather than tightening, the Bridgewater Associates founder said in a client note. He highlighted that risks of deflationary contraction are increasing relative to risks of inflationary expansion.

Signs of an improving U.S. economy had buoyed chances the central bank would hike interest rates this year. But amid slowing global growth, pressures on inflation and rocky stock markets, many market watchers have delayed their expectations for the Fed to tighten.

Ray Dalio, Bridgewater Associates
Scott Mlyn | CNBC
Ray Dalio, Bridgewater Associates

Quantitative easing is the bond-buying program the Fed employed after the financial crisis. The institution also has kept the federal funds rate near zero for most of a decade.

Dalio said central banks have limited tools left at their disposal amid inclinations for easy monetary policy globally.

"The ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias," he wrote. "Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant."

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Trends in declining interest rates have encouraged more borrowing and more leverage, Dalio added.

"These long-term debt cycle forces are clearly having big effects on China, oil producers and emerging countries, which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions," Dalio said.

The CME's FedWatch tool implies a probability of 21 percent that the central bank will life rates in September. Bets have shifted to December or later, with January showing a 54 percent chance.

Reuters contributed to this report.