The CIO of Ray Dalio's Bridgewater says stocks could crash 25% if Fed policymakers fully commit to lowering inflation

• Bridgewater Associates co-CIO Greg Jensen said the Fed could hurt stocks in its fight to lower inflation.
• Stocks could crash 25% from current levels if the Fed commits to achieving its 2% inflation goal.

Ray Dalio's Bridgewater Associates — the world's largest hedge fund — has adopted a cautious forecast on the global economy, and co-CIO Greg Jensen is expecting a downturn.

"We're in a radically different world," he told the Financial Times Wednesday. "We're approaching a slowdown."

Jensen expects inflation will ramp up pressure on the Federal Reserve to hike interest rates beyond what many on Wall Street expect. But the central bank will still tolerate inflation above its 2% target because policymakers won't be able to stomach a brutal stock sell-off, he added. The latest reading on consumer prices showed inflation remains above 8%.

If the Fed actually committed to bringing inflation down to its 2% goal, stocks could crash 25% from current levels, as tightening would have to become more aggressive, which "would then crack the economy and probably crack the weaker [companies] in the economy," he said.

Slowing the economic expansion to rein in high prices will require extreme hawkishness from the Fed, which Jensen said will drain liquidity from financial markets.

"You want to be on the other side of that liquidity hole, out of the assets that require the liquidity and in assets that don't," he explained.

Queen's College president and economist Mohamed El-Erian echoed a similar sentiment Wednesday, as he warned that either stagflation or a recession looms for the US economy because the Fed injected too much liquidity into markets during the pandemic.

"If I were fully invested right now I would take some chips off the table," El-Erian told CNBC. "I would wait for more value to be created."