Hedge fund guru Ray Dalio says he expects the Federal Reserve to make a significant quantitative easing move before it makes a significant interest rate hike.

“To be clear, we are not saying that we don’t believe that there will be a tightening before there is an easing,” Dalio writes in a recent post on his LinkedIn page (h/t MarketWatch). “We are saying that we believe that there will be a big easing before a big tightening. We don’t consider a 25-50 basis point tightening to be a big tightening. Rather, it would be tied with the smallest tightening ever.”

Dalio says that the risks of the world being “at or near the end of its long-term debt cycle are significant”. Being at the end of the long-term debt cycle means interest rates around the world are near zero, spreads are low, and debt levels are high, he says, and central banks have a limited ability to ease — all while many people have a dangerous bias to the long side. He says those secular factors should outweigh short term debt and business cycle factors –which the Fed seems to be weighing more heavily — that would typically mean a tightening phase is due.

Despite the very limited ability to ease at this point, he thinks easing is the path the Fed needs to take. “While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces,” he writes. “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 says that, while the Fed has been more focused on short-term business cycles than the long-term debt cycle, it will react to what happens going forward. He seems to think that will mean more quantitative easing before we hit a significant tightening phase, but he also says that he is worried that the Fed will feel that it must stick to its guns and follow through with the tightening it has been discussing.

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