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.