Tighter monetary policy from the Federal Reserve is starting to drag on economic activity in the United States and is putting pressure on American financial institutions, according to an executive at the world's largest hedge fund.
Bob Prince, co-chief investment officer at Bridgewater Associates, told the Financial Times that he believes the recent volatility in U.S. markets was sparked by Wall Street coming to grips with the fact that both GDP and corporate earnings growth may have topped out.
Prince pointed to the recent rise in interest rates and the dwindling effects from President Donald Trump's tax cuts as suspects for lower expectations.
"A lot of optimism about future earnings growth has been baked into equity valuations. But we are at a potential inflection point where the economy is moving from hot to mediocre," Prince told the FT in an interview. "We are now approaching the stage where monetary tightening could produce, perhaps not a big downturn, but more pressure."
Bridgewater founder Ray Dalio, co-CIO Greg Jensen and Prince manage the firm's $160 billion in assets.
Markets have been on edge as interest rates charged higher in recent weeks, sparking widespread sell-offs in both the Dow Jones Industrial Average and . Though government debt yields were largely unchanged Tuesday, the benchmark 10-year Treasury yield clinched a seven-year high above 3.26 percent last week, while the 30-year bond yield reached a high not seen since 2014.
The S&P 500 is down 4.8 percent in October, while the Dow has lost 3.7 percent for the month.
While concerns about rising rates keep investors anxious, strong economic data fuel worries that the Fed will continue to hike rates to keep inflation grounded.
Following the central bank's move to increase rates a third time this year last month, Fed Chair Jerome Powell said in an interview with PBS that U.S. monetary policy is "far from neutral," suggesting rates have further room to rise.
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