Ray Dalio: The Federal Reserve is in a difficult position and should not cut interest rates, warning of the consequences of "inappropriate rate cuts."

On Tuesday, Ray Dalio, the founder of hedge fund Bridgewater, was asked at an event whether the Federal Reserve has room to cut interest rates given the current economic situation in the United States. In response, Dalio stated that the Federal Reserve is in a difficult position and should not lower interest rates.

Dalio believes that the Federal Reserve should not cut rates at this time, as lowering rates is not an appropriate monetary policy choice. He pointed out that the Federal Reserve is in a very challenging situation, needing to weigh multiple factors. There is significant uncertainty currently, and market sentiment is deteriorating, but in reality, the real economy has not yet shown significant problems. Therefore, the Federal Reserve's situation is quite 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 rate cuts, as those in power typically prefer economic stimulus. Additionally, since interest rates have a huge impact on debt servicing costs, and with current debt levels being so high, the pressure to cut rates will also increase, as lowering rates can alleviate the debt burden.

Dalio pointed out that one person's debt is another person's asset. So the question is, if interest rates are pushed down, the return on assets will decrease. How are interest rates lowered? There may be a situation where rates are cut, but ultimately it will still need to be achieved through some form of intervention, and these interventions will undermine the value of the currency, leading to the "paradox of currency value."

Dalio believes that if we envision a change in monetary policy in the near future, while also considering the impact of the midterm elections, it will be a very concerning time:

If the market sees, for example, an overly aggressive or inappropriate rate cut measure, it could actually have a very negative impact on the bond market. Because doing so would push long-term rates up, steepening the yield curve, and could also lead to a depreciation of the dollar and an increase in gold prices. This dynamic reflects that the market is fleeing the bond market because the value of currency has become important.

This week, heavyweight officials such as the second and third leaders of the Federal Reserve hinted that rates may be maintained at least until September. Atlanta Fed President Raphael Bostic expects there may only be one rate cut this year. Investors currently believe that the likelihood of a rate cut at the next FOMC meeting in June is less than 10%, and expect only two rate cuts this year, each by 25 basis points, down from the market's expectation of four cuts at the end of April