New Bond King: Fed rate cuts this year now "impossible"
- Core View: Renowned investor Jeffrey Gundlach believes the possibility of a Fed rate cut this year has essentially vanished due to stubborn inflation and clear signals from the bond market; meanwhile, he warns of market risks from high stock valuations, private credit risks, and the impact of an oil price shock.
- Key Factors:
- US April CPI surged 3.8% year-over-year, the fastest pace in nearly two years, far exceeding the Fed's 2% target.
- Gundlach predicts the next CPI reading will "start with a 4," indicating further upward pressure on inflation.
- The two-year Treasury yield is nearly 50 basis points higher than the federal funds rate, creating a technical barrier to rate cuts and a credibility risk for the market.
- The Iran conflict is pushing oil prices higher, with rising energy costs set to pass through to CPI, adding resistance to the inflation downtrend.
- Gundlach notes that the Fed's inaction on inflation has fueled stock market speculation, with current market valuations stretched and a strong speculative atmosphere.
- He expresses concern over the private credit market, arguing its structure relies on a constant influx of new investors, reflecting the greed of sponsors.
Original Author: Dong Jing, Wall Street News
Jeffrey Gundlach, CEO of DoubleLine Capital, has made it clear that the possibility of the Federal Reserve cutting interest rates this year has essentially disappeared, with stubborn inflation and signals from the interest rate market jointly blocking the path to monetary easing.
On May 18, according to a Bloomberg report, during an interview on Fox News' "Sunday Morning Futures," Gundlach noted that the market had previously expected 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 higher than the federal funds rate, a rate cut seems completely impossible to me."
As previously mentioned in a Wall Street News article, the U.S. CPI for April jumped 3.8% year-over-year, marking the fastest pace since May 2023. Gundlach warned that the next CPI reading could "start with a 4."
Meanwhile, the Iran conflict has driven oil prices sharply higher, further feeding into U.S. inflation data and exacerbating an already challenging price pressure environment. Gundlach also issued warnings about several market risks, including high stock market valuations and private credit risks, noting that overall market risks are quietly building up.
Stubborn Inflation Closes the Window for Rate Cuts
Gundlach's judgment that the Fed cannot cut rates this year is based on two key dimensions: persistently above-forecast 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 and well above the Fed's 2% policy target. Gundlach stated that DoubleLine's models suggest the overall CPI data for the next period could "start with a 4," indicating that inflationary pressures are not only failing to subside but show signs of further intensification.
From the perspective of the interest rate market, the two-year Treasury yield is currently nearly 50 basis points above the federal funds rate.
Gundlach believes this yield spread itself constitutes a technical barrier to rate cuts—market pricing already reflects expectations of persistent inflation, and if the Fed were to cut rates under these conditions, it would face a serious credibility risk.
The oil price shock from the Iran conflict is another variable that cannot be ignored. Rising energy prices will directly permeate various CPI components, adding new headwinds to the inflation decline. Gundlach expects this upward trend to continue manifesting in inflation reports over the coming months.
Gundlach offered a direct assessment of the situation facing new Fed Chair Kevin Warsh, saying he took the position at a "difficult time."
Upon taking office, Warsh is confronted with a complex mix of high inflation, oil price shocks, and divergent market expectations. The Fed's policy space is constrained on multiple fronts—unable to ignore inflationary pressures and cut rates prematurely, yet also facing uncertainty about the economic growth outlook.
Analysts suggest that Gundlach's remarks imply Warsh has little room to implement accommodative policies in the near term.
Speculative Concerns Behind Strong Stock Market Performance
Despite the turbulent macroeconomic environment, the U.S. stock market has remained "exceptionally strong." Gundlach offered his own interpretation: the market continues to rise precisely because the Fed is holding steady on inflation.
"When the Fed does nothing about inflation, the stock market just goes wild," he said. Corporate earnings continuing to beat 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. "Market valuations are very expensive, and the speculative atmosphere is thick," he said, adding that while earnings data consistently exceeds expectations, this situation itself is "fueling speculative frenzy."
In terms of asset allocation, Gundlach stated he has been "very, very bullish on commodities for the past three years or so." He noted that negative real returns on bonds and the diversion of some speculative interest to assets like Bitcoin mean investors have few attractive alternatives outside of equities.
Gundlach once again issued a stark warning about the private credit market during the interview, choosing his words directly. When asked if he was concerned about this sector, he replied: "Of course, I am worried."
He pointed to a troubling structural characteristic of the private credit market: "This market always seems to need new investors to come in." He believes this may reflect the greed-driven logic of sponsors—"they just want to manage more and more assets, relentlessly."
Original Link
