Ray Dalio Says Latest Fed Move Leaves Little Firepower Left

(Bloomberg) -- The Federal Reserve’s decision to cut rates to almost zero puts the markets in an even more precarious position, according to Ray Dalio.

“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, founder of Bridgewater Associates, in a LinkedIn post 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.”

In the second emergency interest-rate cut in two weeks on Sunday, the Fed slashed its benchmark back to essentially zero and announced a massive program of bond-buying. It was the latest attempt to save an 11-year expansion from the coronavirus pandemic, which has wreaked havoc across financial markets and threatens to tip the U.S. into recession too -- if it hasn’t done so already.

Read more: The U.S. May Already Be in a Recession

Fiscal and monetary policy makers should focus on helping industries that will struggle to repay their debt as a result of the economic shock. The billionaire said that 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, he said.

“I’m seriously concerned by what I see, which is that a number of companies and industries will have debt problems that will likely lead to restructurings,” Dalio wrote. “If handled badly, this could become a big political and social issue. If I were in President Trump’s shoes, I’d be generous and empathetic, especially as the news will become increasingly bad at this politically sensitive time.”

Dalio, whose macro fund dropped about 20% this year through Thursday, found himself on the wrong side of the market rout caused by the escalating coronavirus pandemic. He said in the post that he hasn’t been able to anticipate the market moves “because of the extremely rare nature of the circumstances.”

Read more: Ailing Credit Market Needs Big Help From Fed, Marshall Wace Says

He made the following observations about Europe and Asia:

• Countries in the European Union are likely to do “whatever it takes” fiscally, but the European Central Bank will be too constrained to absorb the forthcoming debt through bond purchases. This means interest rates will rise. “God help us if that happens,” he said.
• The ECB is likely to consider raising liquidity for SMEs, but it won’t do much, Dalio wrote. The most important test will be whether the monetary authority raises its bond-buying limits to hold interest rates down. “A yes on that will buy some time to help fund the deficit but still won’t be enough longer term while a no would be very worrisome.”
• The Bank of Japan is more squeezed than other central banks because in addition to having limited firepower, the country has a strong currency, he wrote. However, it has more flexibility than others in what it can buy and how much.
• Chinese policy makers have issued the most appropriate responses, because fiscal and monetary authorities have greater ability to coordinate, he said. Fiscal measures have amounted to about 1.2% of GDP, while the central bank has more room to maneuver and more levers to pull.

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