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Count Ray Dalio among the skeptics when it comes to the Federal Reserve’s efforts to prop up a coronavirus-hit U.S. economy.
The Bridgewater Associates founder penned a 4,000-word LinkedIn post on Monday giving his thoughts on the current economic volatility and the U.S. central bank’s efforts to contain them. In particular, the billionaire hedge funder expressed concerns that a “hard 0% floor” could prove counterproductive for many asset classes, and will deprive the Fed and other central banks of the ammunition to take further action if needed.
“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 as much),” Dalio wrote. “Hitting this 0% floor also means that virtually all the reserve country central banks’ interest rate stimulation tools (including cutting rates and yield curve guidance) won’t work.”
Dalio added that 0% interest rates would also diminish the impact of central banks’ “printing of money and buying of debt assets,” and could also spur “real interest rates [to] likely rise because there will be disinflation or deflation resulting from lower oil and other commodity prices, economic weakness, and more credit problems.”
With credit spreads potentially rising as a result, Dalio said debt service payments to “weaker credits” would also rise “at the same time as credit lending shrinks,” which would further spur “deflationary pressures and negative growth forces.”
“God help those countries that have these things and a rising currency, too,” he wrote.
To address some of these issues, the Bridgewater head called for “big fiscal stimulation” on the part of the federal government—but bemoaned the fact that lawmakers have yet to take such action, and appear unwilling to work together to do so.
“Our biggest economic risk comes from the possibility that our elected officials (who are the ones who control fiscal policy) will handle it badly,” he wrote. “It’s tough enough to know what to do during a big crisis and then do it boldly even when there aren’t divisive politics. With the divisive politics, it might be impossible.”
Yet Dalio holds hope that lawmakers, including President Trump are “moving into the ‘whatever it takes’ mode” as far as addressing the current crisis—despite his assertion that “talk of a payroll tax cut” falls wide of the mark as far as addressing “where the problems are.” He also noted that most of the measures pursued thus far, including an increase in subsidized Small Business Administration loans, “will need to be much bigger” to proportionally address economic headwinds. “Thus far, there has not been much debt support to industries that would go broke due to this shock,” he wrote.
In addition to slashing interest rates to near-zero, the Fed has also taken measures to pump liquidity into the markets for U.S. Treasuries and mortgage-backed securities and to allow banks and depository institutions to more easily lend to businesses and households in needs.
Despite Dalio’s reservations, some Wall Street economists on Monday said that they believe the central bank still has ammunition to take further action if needed. Jefferies chief market strategist David Zervos noted that “there are plenty of bazookas left in the [Fed’s] war chest,” while UBS economists think the Fed will likely increase the amount of liquidity it pumps into securities markets through its quantitative easing initiatives.
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