Ray Dalio, the legendary founder and co-chief investment officer of Bridgewater Associates, says the Fed’s surprise decision Sunday to slash short-term interest rates to close to zero may end up doing more harm than good.
“Long-term interest rates hitting the hard 0% floor means that virtually all asset classes go down because the positive effects of interest rates falling won’t exist (at least not much),” said Dalio, in a LinkedIn post published Monday.
“Hitting this 0% floor also means that virtually all the reserve country central banks’ interest rate stimulation tools (including cutting them and yield curve guidance) won’t work,” wrote Dalio, whose macro fund was off about 20% year to date through last Thursday, according to Bloomberg News.
In the U.S., the 10-year Treasury note is currently yielding about 75 basis points, but short-term Treasury bill rates are near 25 basis points following the Fed’s 1% cut in the federal funds rate on Sunday to a 0-0.25% range.
That rate cut “has wreaked havoc across financial markets and threatens to tip the U.S. into recession too — if it hasn’t done so already,” wrote Dalio. “Contrary to popular thinking, the markets will have a bigger effect on the economy than the economy will have on the markets.”
Dalio said that government and central bank policymakers around the globe should now “focus on helping industries that will struggle to repay their debt as a result of the economic shock…. Lawmakers must take on bigger, targeted measures, such as providing government protection on loans and guaranteeing the safety of the banks that make those loans. The Fed, meanwhile, should provide liquidity to banks to fund those loans.”
Dalio noted that “the response thus far has been inadequate in size, focus, and coordination but that has varied a lot by country,” although he noted “there have been signs of fiscal and monetary policy makers moving to much stronger ‘do whatever it takes’ policies.”
But even that approach could fail, according to Dalio, because of constraints on governments and especially central banks.
“The ECB can’t do much because it can’t cut rates and it doesn’t have the authority to buy the quantity it needs to buy,” writes Dalio.
The U.S. House-approved legislation that allows for free testing for the virus, expands unemployment insurance, paid sick leave for those affected, and subsidized meals for students eligible for free school lunches includes measures that are “relatively small and offer modest support to those with economic problems. They will need to be much bigger.”
The Senate is expected to vote on the House bill shortly.
In Japan, recent spending packages that support health care services, provide aid to working parents forced to take leave and aid small and medium-size enterprises “look good” but are “not yet enough in light of their total picture,” Dalio writes.
Ultimately, “the wealth and political gaps will test social and political abilities to cooperate and help rather than hurt each other in dealing with these problems,” writes Dalio.
On Monday the International Monetary Fund pledged $1 trillion to help countries struggling with the economic and humanitarian repercussions of the coronavirus, which has infected more than 110,000 people and killed more than 6,500 worldwide.
The fiscal stimulus being put in place by governments around the world is not large enough nor targeted enough to “neutralize the contagion of the economic and market effects” of the spreading coronavirus.
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