On Tuesday, Dalio, founder of the hedge fund Bridgewater, was asked at an event whether there is room for the Federal Reserve to cut interest rates given the current economic situation in the U.S. In response, Dalio stated that the Federal Reserve is in a difficult position and should not cut rates. He believes that the Federal Reserve should not be cutting rates at this time, as it is not an appropriate monetary policy choice. He pointed out that the Federal Reserve is in a very tough spot, needing to weigh multiple factors. There is significant uncertainty now, 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 interest rate cuts, as those in power usually prefer economic stimulus. Moreover, since interest rates have a huge impact on debt servicing costs, and with debt levels so high now, the pressure to cut rates will also increase, as lowering rates can alleviate debt burdens. Dalio pointed out that one person's debt is another person's asset. So the question is, if interest rates are lowered, then the return on assets will decrease. How are interest rates lowered? There may be a situation where rates are cut, but ultimately it must be achieved through some form of intervention, which will undermine the value of the currency, leading to a 'contradiction in currency value'.
Dalio believes that if we envisage a change in monetary policy in the near future, while also considering the impact of midterm elections, it would be a very concerning time:
If the market sees, say, an excessively aggressive or inappropriate interest rate cut, it could actually have a very negative impact on the bond market. This would push long-term interest rates up, steepening the yield curve, and could also lead to dollar depreciation and rising gold prices. This dynamic reflects that the market is fleeing the bond market, as the value of currency becomes important.
This week, heavyweight officials such as the second and third in command of the Federal Reserve hinted that interest rates might be maintained until at least September. Atlanta Fed President Bostic anticipates only one rate cut this year. Investors currently believe that the chance of a rate cut at the next FOMC meeting in June is less than 10%, expecting only two rate cuts this year, each by 25 basis points, down from the four cuts expected at the end of April.
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Original author: He Hao, Wall Street Insight
『Dalio: The Federal Reserve Should Not Cut Interest Rates! Warning of Potential Currency Value Contradictions and Dollar Depreciation』This article was first published in 'Cryptocurrency City'