"New Bond King": Fed rate cuts "already impossible" this year
- Core View: Renowned investor Jeffrey Gundlach believes the possibility of a Fed rate cut this year has virtually disappeared, due to stubborn inflation and clear signals from the interest rate market. He also warns of potential market risks arising from high stock valuations, private credit risks, and the impact of oil prices.
- Key Elements:
- U.S. CPI for April surged 3.8% year-over-year, the fastest pace in nearly two years, significantly exceeding the Fed's 2% target.
- Gundlach predicts the next CPI reading will "start with a 4," suggesting inflationary pressures are showing signs of further escalation.
- The 2-year U.S. Treasury yield is nearly 50 basis points higher than the federal funds rate, creating a technical obstacle and a credibility risk for rate cuts.
- The war in Iran is driving oil prices higher, and rising energy costs will feed into CPI, adding resistance to declining inflation.
- Gundlach points out that the Fed's inaction on inflation is actually fueling stock market speculation, with the current market characterized by expensive valuations and rampant speculation.
- He expresses concern about the private credit market, believing its structure relies on new investor inflows, reflecting the greed logic of sponsors.
Original author: Dong Jing, Wallstreetcn
Jeffrey Gundlach, CEO of DoubleLine Capital, has made it clear that the possibility of a Fed rate cut this year has essentially disappeared. Stubborn inflation and signals from the interest rate market have jointly closed the door for monetary easing.
On May 18, according to a Bloomberg report, in an interview with Fox News' "Sunday Morning Futures," Gundlach pointed out that the market had previously anticipated two rate cuts this year, but inflation data has consistently failed to cooperate. He stated bluntly:
"With the two-year Treasury yield nearly 50 basis points above the federal funds rate, a rate cut seems impossible to me."
As mentioned in a previous Wallstreetcn article, the US April CPI jumped 3.8% year-over-year, the fastest pace since May 2023. Gundlach warned that the next CPI data point "will start with a 4."
Meanwhile, the war in Iran has driven oil prices significantly higher, further transmitting to US inflation data and compounding already challenging price pressures. Gundlach also issued warnings on high stock valuations, private credit risks, and other market vulnerabilities, signaling that overall market risks are quietly accumulating.
Stubborn Inflation, Window for Rate Cuts Closed
Gundlach bases his judgment that the Fed cannot cut rates this year on two key factors: persistently exceeding expectations in inflation data, and clear signals from the interest rate market.
The April CPI rose 3.8% year-over-year, the highest increase in nearly two years, far exceeding the Fed's 2% policy target. Gundlach stated that DoubleLine's model indicates the headline CPI for the next period "will start with a 4," meaning inflationary pressures are not only failing to subside but show a trend of further acceleration.
From an interest rate market perspective, the two-year Treasury yield is currently nearly 50 basis points above the federal funds rate.
Gundlach believes that this spread structure itself constitutes a technical obstacle to rate cuts. The market pricing already reflects expectations of persistent inflation. If the Fed were to cut rates now, it would face a severe credibility risk.
The oil price shock from the Iran war is another variable that cannot be ignored. Rising energy prices will directly permeate various components of the CPI, adding new resistance to bringing inflation down. Gundlach expects this upward trend to continue to be reflected in inflation reports over the coming months.
Gundlach offered a direct assessment of the position of the new Fed Chair, Kevin Warsh, stating that he is taking over at a "tough time."
Upon taking office, Warsh immediately faces a complex situation with high inflation, oil price shocks, and divergent market expectations. The Fed's policy space is constrained from multiple angles – it cannot ignore inflationary pressures to cut rates rashly, yet it also faces uncertainty regarding economic growth prospects.
Analysts suggest Gundlach's remarks imply that Warsh has almost no room for easing policies in the near term.
Speculative Concerns Behind Strong Stock Market
Despite the turbulent macro environment, the US stock market remains "unusually strong." Gundlach offered his interpretation: it is precisely because the Fed has stayed inactive on inflation that stocks have continued to rise.
"When the Fed does nothing about inflation, the stock market just goes up," he said. Corporate earnings consistently exceeding expectations have further fueled speculative sentiment in the market.
However, Gundlach also pointed out that the current stock market has already internalized a considerable degree of risk. "Valuations are very high, and the speculative atmosphere is thick," he stated. While earnings data continue to beat expectations, this situation itself is "fueling speculative frenzy."
In terms of asset allocation, Gundlach mentioned that he has "been very, very bullish on commodities for about the last three years." He noted that negative real bond yields and some speculative assets like Bitcoin diverting some interest mean investors have almost no attractive alternatives outside of stocks.
Gundlach once again issued a stark warning about the private credit market in the interview, using direct language. When asked if he was concerned about this sector, he replied: "Of course, I am."
He pointed out a troubling structural characteristic of the private credit market: "This market always seems to need new investor money coming in." He believes this might reflect the greed logic of sponsors – "They just want to manage more and more assets."
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