Billionaire investor Ray Dalio has issued a cautionary statement regarding the Federal Reserve’s recent decision to halt its quantitative tightening (QT), predicting that this move may usher in a dangerous cycle characterized by “stimulating into a bubble.” As the founder of Bridgewater Associates, Dalio argues that the Fed’s shift from reducing its balance sheet to maintaining it at $6.5 trillion will drive up the prices of gold and Bitcoin significantly before a catastrophic downturn occurs.
The Federal Reserve has announced that quantitative tightening will officially end on December 1, 2025, transitioning to a phase of balance sheet maintenance while reallocating income from agency securities into Treasury bills, thereby moving away from mortgage-backed securities. Dalio perceives this as more than a mere “technical maneuver,” especially given the current context of significant fiscal deficits and robust private credit growth.
Recent data reveals that the S&P 500 earnings yield stands at 4.4%, marginally surpassing the 10-year Treasury yield of 4%. This creates an equity risk premium of just 0.4%, a situation that signals potential trouble ahead. Dalio stresses that past instances of quantitative easing (QE) were implemented under vastly different circumstances, typically during economic downturns marked by falling asset values, low inflation, and widening credit spreads. In stark contrast, the current economic landscape is vibrant, with stock markets reaching all-time highs, an annual growth rate of 2%, unemployment at 4.3%, and inflation above the Federal Reserve’s 2% target, sitting at over 3%.
Dalio points out that the current easing measures could foster a bubble rather than address economic weakness. He specifically notes the inflated valuations in artificial intelligence stocks, which are already emerging as indicators of speculative excess. The confluence of large fiscal deficits, shortened Treasury maturities designed to counteract weak long-term bond demand, and expanded central bank balance sheets reflects what Dalio terms “classic Big Debt Cycle late-cycle dynamics.”
Market analysts echo these concerns. Cristian Chifoi emphasizes that actual liquidity began flooding markets between October and December 2022, as tightening policies effectively concluded, with measures such as the Reverse Repo Program marking the onset of increased liquidity. Ted Pillows, another market expert, cautions that the crypto markets may not find a bottom until genuine quantitative easing begins, as evidenced by a previous 40% decline in altcoins following the Fed’s 2019 QT pause.
In light of the shifting policy landscape, gold has seen a notable resurgence, recovering above $4,000 per ounce after initial volatility following the Fed’s announcement. The World Gold Council reported a 3% year-over-year increase in global demand during Q3 2025, with investment demand reaching record highs and prices setting 13 new all-time highs within the quarter. Dalio explains the appeal of gold: with its zero yield compared to the approximately 4% offered by 10-year Treasuries, investors must expect gold’s price appreciation to surpass 4% annually to justify holding the metal over bonds.
Central bank purchases of gold have surged, accelerating year-over-year by 10%, with Poland expanding its buying programs and Brazil resuming purchases for the first time since July 2021. Historically, Bitcoin has outperformed gold during times of financial uncertainty, raising questions about its future performance as liquidity conditions shift.
Dalio’s most pressing prediction focuses on the consequences of increased Fed balance sheet expansion alongside anticipated interest rate cuts and substantial fiscal deficits. This interplay of monetary and fiscal policies could serve to monetize government debt, leading to lower real interest rates, compressed risk premiums, and inflated price-to-earnings multiples. As a result, long-duration assets like technology and AI stocks, along with inflation hedges such as gold and inflation-indexed bonds, are likely to benefit.
He warns that similar to the liquidity melt-up witnessed in late 1999 and 2010-2011, a surge in the market could occur before risks escalate to a level requiring intervention. According to Dalio, this period of heightened liquidity represents an ideal opportunity for traders to sell, particularly just before tightening measures are implemented to curb inflation, a move that may ultimately burst the looming bubble.
