Fed policy worries Ray Dalio

The US Federal Reserve is stimulating the economy even as markets soar and employment remains strong. For Ray Dalio, this unusual combination does not bode well. The legendary investor sees this as the symptoms of the end of a major economic cycle, where excessive debt forces monetary authorities to play with fire.

Ray Dalio warns of a bubble fueled by the Fed

Ray Dalio, emblematic figure of global finance, has just published a scathing analysis of the Federal Reserve's current choices.

The founder of Bridgewater Associates points out a major anomaly: the Fed is lowering its rates while the American economy is in excellent health.

Normally, the central bank only intervenes when activity slows, unemployment rises and markets collapse. This was the case during the Great Depression of the 1930s or during the financial crisis of 2008.

Today, the picture is radically different. The United States is experiencing a historically low unemployment rate, sustained economic growth and financial markets at an all-time high.

However, the Fed lowered rates by 25 basis points in October and could do so again in December. This “dangerous” configurationaccording to Dalio, characterizes economies in the final phase of a major economic cycle, burdened by excessive debt.

The former hedge fund manager doesn't mince his words. He calls this combination of expansionary fiscal policy and monetary easing “most inflationary.”

The American government is already running colossal deficits by massively issuing short-term Treasury bills. By injecting additional liquidity, the Fed risks monetizing this debt rather than supporting the private sector. In other words, the money created is used to finance public spending without truly stimulating the productive economy.

This dynamic occurs in a tense political climate. Donald Trump recently intensified his criticism of Jerome Powell, going so far as to publicly mention his replacement “very soon”. This political pressure on the independence of the Fed adds an additional layer of uncertainty.

Bitcoin and gold, the big winners from monetary depreciation?

Faced with this troubling macroeconomic picturecertain assets are doing well. Bitcoin and gold are naturally establishing themselves as preferred safe haven values. The logic is relentless. The more the money supply increases and the more debt is monetized, the more fiat currency loses its value. Investors then turn to rare and non-manipulatable assets.

Continued inflationary pressure and dollar depreciation are powerful catalysts for Bitcoin. Unlike traditional currencies, the number of bitcoins is strictly limited to 21 million units.

This planned scarcity makes it a bulwark against monetary dilution orchestrated by central banks. Many analysts now view the flagship crypto queen as a hedge against major macroeconomic and geopolitical risks.

However, crypto markets remain cautious. During the October rate cut, prices did not jump as expected. Matt Mena, analyst at 21Shares, explains that this decision was “fully integrated” by investors. Traders had largely anticipated this announcement, neutralizing its potential positive impact.

Uncertainty hangs over the Fed's next decision. According to data from the Chicago Mercantile Exchange, 69% of investors are betting on a further cut of 25 basis points in December.

Jerome Powell cooled the markets in October, reminding us that a rate cut in December remains uncertain. In this unstable climate, Ray Dalio's warnings take on their full meaning. The Fed is stimulating an already strong economy, at the risk of fueling a bubble and inflation. For investors, each decision could seal the end of a historic cycle.