The Federal Reserve faces a challenging task as the economy grapples with a significant debt burden.

• The U.S. Federal Reserve cut interest rates for the first time since the early Covid pandemic, and billionaire investor Ray Dalio warned that the U.S. economy still faces a significant amount of debt.
• "According to the founder of Bridgewater Associates, the Federal Reserve faces the challenge of balancing keeping interest rates high enough to benefit creditors, while not making them too high and causing problems for debtors, as stated on CNBC's "Squawk Box Asia.""

The U.S. Federal Reserve cut interest rates for the first time since the early Covid pandemic, and billionaire investor Ray Dalio warned that the U.S. economy still faces a significant amount of debt.

The federal funds rate has been cut by 50 basis points to a range of 4.75% to 5%, which affects short-term borrowing costs for banks and various consumer products, including mortgages, auto loans, and credit cards.

"The challenge for the Federal Reserve is to strike a balance between keeping interest rates high enough to benefit creditors and not so high as to cause problems for debtors, as stated by the founder of Bridgewater Associates on CNBC's "Squawk Box Asia" on Thursday."

The national debt of the U.S. has grown to $35.3 trillion, resulting in more than $1 trillion spent on interest payments this year. This increase in debt service costs coincided with a significant rise in the U.S. budget deficit in August, which is approaching $2 trillion for the year.

On Thursday, Dalio elaborated on his point from Wednesday, expressing concern about the "enormous amount of debt" being created by governments and monetized by central banks, which he noted have never existed in his lifetime.

To prevent an economic collapse, governments worldwide incurred massive debt burdens by financing stimulus packages and other economic measures during the pandemic.

Dalio stated that he does not see a credit event in the near future when asked about his outlook.

"Through a combination of artificial low real rates, the value of that debt is significantly decreasing, which means you won't be compensated," he stated.

Dalio pointed out that although the economy is in relative equilibrium, there is an enormous amount of debt that needs to be rolled over and sold, as well as new debt created by the government.

According to Dalio, neither former President Donald Trump nor Vice President Kamala Harris is likely to prioritize debt sustainability, which means that the pressures of debt will not be relieved regardless of who wins the upcoming presidential election.

Dalio believes that the path will eventually lead to monetizing debt, similar to Japan's approach of keeping interest rates low, which has led to a depreciation of the yen and a decrease in the value of the dollar.

"The value of a Japanese bond has decreased by 90%, resulting in a significant tax through artificially lowering the yield annually," he stated.

Japan's central bank maintained its negative rates regime for years while pursuing one of the world's most aggressive monetary easing programs. The bank only recently raised interest rates in March of this year.

If markets lack buyers for debt supply, interest rates may increase or the Fed may intervene and purchase, according to Dalio's prediction.

The billionaire stated that the Fed's intervention was a significant negative event, and the oversupply of debt raises questions about payment.

If we were using hard money, then you would have a credit event. However, in fiat currency, central banks are purchasing your debt, effectively monetizing it.

Dalio anticipates that all currencies will depreciate in value as they are all relative to one another in that scenario.

He stated that the environment would resemble the 1970s or the 1930s to 1945 period.

Dalio claims that he does not prefer debt assets for his portfolio, stating, "If I'm going to take a risk, it would be by underweighting debt assets such as bonds."