Dalio believes that the Federal Reserve should not cut interest rates at this time, as cutting rates is not an appropriate monetary policy choice.

Written by: He Hao

Source: Wall Street Journal

On Tuesday, Ray Dalio, the founder of hedge fund Bridgewater, was asked at an event whether the Federal Reserve has room to cut interest rates given the current economic situation in the United States. In response, Dalio stated that the Federal Reserve is in a difficult position and should not cut rates.

Dalio believes that the Federal Reserve should not cut interest rates at this time, as cutting rates is not an appropriate monetary policy choice. He pointed out that the Federal Reserve is in a very challenging situation, needing to weigh multiple factors. There is currently significant uncertainty, and market sentiment is deteriorating, but in reality, the real economy has not yet shown significant problems. Therefore, the Federal Reserve's situation is very tricky.

Dalio mentioned that from a longer-term perspective, political factors will influence future monetary policy. If a new Federal Reserve chair takes office, it is more likely to push for rate cuts, as those in power typically prefer economic stimulus. Additionally, since interest rates have a huge impact on debt servicing costs, and with current debt levels being so high, the pressure to cut rates will also increase, as cutting rates can alleviate the debt burden.

Dalio pointed out that one person's debt is another person's asset. So the question is, if interest rates are pushed down, then the return on assets will decrease. How are interest rates pushed down? There may be a situation where rates are lowered, but ultimately it will still need to be achieved through some form of intervention, and these interventions will weaken the value of the currency, leading to the "paradox of currency value."

Dalio believes that if we envision a change in monetary policy in the near future, while also considering the impact of the midterm elections, it will be a very concerning time:

If the market sees, for example, an overly aggressive or inappropriate rate cut measure, it could actually have a very negative impact on the bond market. Because doing so would push long-term interest rates up, steepening the yield curve, and could also lead to a depreciation of the dollar and an increase in gold prices. This dynamic reflects that the market is fleeing the bond market because the value of currency has become important.

This week, heavyweight officials such as the second and third in command of the Federal Reserve hinted that interest rates may be maintained at least until September. Atlanta Fed President Bostic expects there may only be one rate cut this year. Investors currently believe that the likelihood of a rate cut at the next FOMC meeting in June is less than 10%, and they expect only two rate cuts this year, each by 25 basis points, which is lower than the market's expectation of four rate cuts at the end of April.

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