Dalio: Fed in a Difficult Position, Should Not Cut Rates, Warns of Consequences of 'Inappropriate Rate Cuts'

Original Title: "Dalio: The Fed is in a Difficult Position, Should Not Cut Rates, Warns of Consequences of 'Inappropriate Rate Cuts'"

Original Author: He Hao, Wall Street News

On Tuesday, Ray Dalio, the founder of hedge fund Bridgewater, was asked about the possibility of the Fed cutting rates given the current economic situation in the U.S. In response, Dalio stated that the Fed is in a difficult position and should not cut rates. Dalio believes that the Fed should not cut rates at the moment, as rate cuts are not the appropriate monetary policy choice. He pointed out that the Fed is in a very challenging situation and needs to balance multiple factors. There is currently significant uncertainty and deteriorating market sentiment, but the real economy itself has not shown significant problems yet. Therefore, the Fed's situation is very tricky.

Dalio mentioned that from a longer-term perspective, political factors will impact future monetary policy. If a new Fed chair takes office, it is more likely to push for rate cuts because policymakers usually prefer economic stimulus. Additionally, as interest rates have a significant impact on debt servicing costs, and debt levels are currently so high, the pressure for rate cuts will also increase as rate cuts can ease debt burdens. Dalio pointed out that one person's debt is another person's asset. So the issue is that if rates are lowered, the return on assets will also decrease. So, how are rates lowered? There may be rate cuts, but ultimately, some form of intervention is needed to achieve this, and these intervention measures will weaken the currency's value, leading to a "currency value dilemma."

Dalio believes that if we imagine a future where monetary policy changes, taking into account the impact of midterm elections, it will be a very worrying period:

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

This week, heavyweight officials such as the Fed's number two and three have spoken out, hinting that rates may stay until at least September, with Atlanta Fed President Bostic expecting possibly only one rate cut this year. Investors currently see less than a 10% chance of a rate cut at the next FOMC meeting in June and expect only two rate cuts this year, each by 25 basis points, lower than the four rate cuts expected by the market at the end of April.

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