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- The Federal Reserve will be forced to increase its quantitative easing program by buying more bonds as interest rates continue to rise, according to Ray Dalio.
- Dalio believes that the recent $ 1.9 trillion fiscal stimulus project will stimulate more treasury offers by the U.S. government, further damaging the “bond supply / demand problem,” said Dalio.
- At his most recent Fed meeting, President Jerome Powell said his current monetary policy is appropriate.
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The Federal Reserve will have to renew its quantitative easing program and buy more bonds to help limit interest rate hikes, according to hedge fund billionaire Ray Dalio and first published by Bloomberg.
In a panel on Saturday at the China Development Forum, Dalio said that the recently approved $ 1.9 trillion COVID-19 stimulus project will lead the US government to raise more money by issuing more treasury bills, further worsening the “supply / demand problem for bonds”.
This problem of supply and demand for bonds will lead to a further increase in interest rates, which has already wreaked havoc in certain parts of the stock market, such as the high-growth technology sector, as 10-year Treasury yields reached a pre-pandemic peak of 1.75% last week.
A continued rise in interest rates “will make the Federal Reserve have to buy more [bonds], which will put downward pressure on the dollar, “said Dalio. The Fed already buys around $ 120 billion in bonds a month.
In a terrible scenario, Dalio explained that the world is “very overwhelmed in bonds” with negative yields and that “not only may there not be enough demand, but it is possible that we will start to see the sale of these bonds”. according to Bloomberg.
According to Bank of America, there is currently $ 13.7 trillion in negative yield debt. If the bonds are settled by investors, “the situation is low for the dollar”, according to Dalio.
Despite concerns, Fed Chairman Jerome Powell said last week that his current monetary policy is adequate and has backed down against the idea that the recent jump in interest rates poses a problem for the economy.