Jeffrey Gundlach sees a neutral monetary policy following the Fed’s latest rate, the tenth, consecutive rate hike in May, which has taken the Fed fund rates to 500 basis points, or 5 per cent.
“The Fed will not raise rates again,” tweeted Jeffrey Gundlach May 5.
Not committed to tightening or losing is why Jeffrey Gundlach sees a neutral monetary policy going forward.
Commenting on May’s FOMC meeting Jeffrey Gundlach noted that the Fed Chair Powell made no predictions or a decision regarding future rate decisions.
“The Fed will not raise rates again”
Here is the piece in Fed Chair Powell’s speech supporting Jeffrey Gundlach sees a neutral monetary policy view;
“We feel like we are getting closer or maybe even there,” said Powell.
Jeffrey Gundlach thought that the Fed Chair Powell was correct to acknowledge falling inflation but he also acknowledged in the same breath that inflation is not going to come down as quickly anymore.
Jeffrey Gundlach cited that the latter part put the Fed in a neutral stance.
So despite inflation falling at a slower rate Jeffrey Gundlach noted that the Fed sounded resolute not stepping away from the 2% inflation commitment.
“It is completely consistent with the way the treasury market has been pricing it,” he said.
“We feel like we are getting closer or maybe even there”
FED CHAIR POWELL
Jeffrey Gundlach sees a neutral monetary policy as the CPI inflation data falls below 5% to its April CPI of 4.9%
“We believe low inflation print for CPI will be about 4% this year,” he said.
“That would imply that the Fed will keep rates where they are now unless something goes wrong with the economy, which is certainly not a low-probability outcome, ” he added.
The Fed is jungling a financial crisis, which could be why Jeffrey Gundlach sees a neutral monetary policy.
“We have had bank failures, people are not used to rising interest rates and staying there for some time is going to have ramifications,” he said.
“People are pulling money out because there is no reason to keep money in banks” – Jeffrey Gundlach
Ongoing bank runs could be the main reason Jeffrey Gundlach sees a neutral monetary policy
“People are pulling money out because there is no reason to keep money in banks, you can get higher interest rates by a lot thanks to Fed 500 basis point increases. You can get bills at 5.2% for a couple of months,” he said. “It just seems to me that deposits are going to keep flowing out,” he said.
“I don’t think it is going to stop unless the Fed cuts interest rates,” he added.
“Jeffrey Gundlach believes the Fed is showing no inclination to cut rates at June’s next meeting.
The bond market is saying there are not going to be rate hikes and there are going to be rate cuts almost assuredly by the end of this year,” he added, “recessionary odds are pretty darn high right now.”
Jeffrey Gundlach agreed with Powell’s speech, which acknowledged the 500 basis point increase in a backdrop of contraction and bank failures, which has led to this neutral sentiment.
But he also thinks the market could be too optimistic for risk assets, given a cocktail of tighter credit and economic contraction.
Risk assets took a big hit in 2022 and are gyrating around depressed prices
“We should expect higher default rates and a deterioration in fixed-income securities as we move into the end of the year. I think investors should go up in quality in their bond portfolio,” he said.
He thinks rates finally might crack down below 337 on the ten-year.
“If there is a recession, we might get to it. I am toying with the idea that this is the last quality rally that creates profits for treasury bonds,” he added.
“I am worried about the deficit in the US, which is not even in a recession, although the economy is growing at 1.1 % in the first quarter.
US debt to GDP was 129% in 2022,” he said.
“We are going to have big problems with debt,” he added.
“We would not have had this banking crisis if the Fed raised rates higher earlier in 2022” – Jeffrey Gundlach
Jeffrey Gundlach thinks the Fed should not have hiked in May, and he thinks the Fed started raising rates too slowly. They should have raised rates higher last year.
He Referred to the Fed’s strategy of small incremental rate hikes spread over 2022 as the meat grinder approach, which the bond market rejects.
“We would not have had this banking crisis if the Fed raised rates higher earlier in 2022, like, 200 basis point hike should have been their first move,” he said.
Indeed, 400 billion US dollars have left bank deposits in the first three months, and there have been three bank failures.
So Jeffrey Gundlach sees a neutral monetary policy and continues to criticise the Fed’s slow tightening approach in 2022.
“We probably would not have got the long bond to a 50 per cent drawdown that hurt SVB and other banks. There remains a lot of long-maturity bonds underwater in banking portfolios. I would bet pretty strongly the Fed will not raise interest rates again,” he said.
Jeffrey Gundlach sees a neutral monetary policy, then rate cuts in Q3, 2023
He thinks high-yield bond spreads should be much higher.
We should expect low-quality bond defaults starting in the fourth quarter of this year. “Risk needs to be managed carefully,” he said.
In light of May’s fed rate hike, he logically believes stress in the baking system could worsen.
“This will continue to haunt the Fed,” he said.
He sees a 75 basis point cut by the end of the year.
A weaker dollar supports Jeffrey Gundlach sees neutral monetary policy view with rate cuts in the later part of the year.
Jeffrey Gundlach thinks the US dollar will continue to head lower. He also recommends owning non-US risk assets like Europe, Emerging Market equities, Asia, X-China and regions of South America.
“Stay away from anything below a double B or single B and junk bonds,” he said. He has a core holding in gold.
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