The US Federal Reserve risks causing a 1937-style stock market slump when it finally moves to raise interest rates, one of the world’s most powerful hedge fund managers has warned.

Ray Dalio, founder of the $165bn hedge fund group Bridgewater Associates, said in a note to clients and followers that he is avoiding large bets on the financial markets for fear that the Fed’s expected change of policy could have dramatic unintended consequences.

The note emerged as Christine Lagarde, head of the International Monetary Fund, warned that US rate increases could trigger instability in emerging markets, leading to a re-run of the Fed-induced “taper tantrum” of 2013. The comments frame a high-stakes Fed meeting at which the central bank’s policy makers are expected to open the door to the first US rate hikes in nearly a decade.