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Fed Willing to Let Stocks Drop 15-20% More: Bridgewater

With inflation soaring and unemployment dropping, the Fed has little reason to act, says Bridgewater's Co-CIO Greg Jensen.
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The Federal Reserve is prepared to let the stock market drop another 15% to 20% before it acts in any way to stem the decline, says Greg Jensen, co-chief investment officer at Bridgewater Associates, the world’s biggest hedge fund.

With inflation soaring and unemployment dropping, the Fed has little reason to act, he told Bloomberg. Consumer prices soared 7% last year, and the unemployment rate dipped to 3.9% in December from 4.2% in November.

So the Fed is likely to be happy with the stock market losing its froth, Jensen said. The S&P 500 index has slid 8% so far this year.

“Some decline in asset prices is not a bad thing from the Fed’s perspective, so they’re going to let it happen,” Jensen he said. “At these levels, it would take a much bigger move to get the ‘Fed put’ into the money. They’re a long way from that.” The “Fed put” is the idea that the central bank will bail out a plunging stock market by easing policy.

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The Fed might even let the stock market go down more than 15% to 20% without reacting, depending how quickly the downturn occurs, Jensen said. The recent drop has been “mostly healthy,” as it has “deflated some of the bubbles,” such as cryptocurrencies, he said.

Meanwhile, Interest-rate futures traders now expect the Fed to raise interest rates five times this year, according to the CME Fed Watch Tool.

Before the Fed’s meeting, which ended Wednesday, the consensus among many economists and investors was for four rate hikes this year. But Fed Chairman Jerome Powell issued hawkish commentary after the meeting.