'Bond King' Jeffrey Gundlach warns of jumbo rate hikes because the US economy is too hot
- Billionaire investor Jeffrey Gundlach says the Fed is "very likely" to raise interest rates by 50 basis points at its next meeting.
- The "Bond King" pointed to a strong US economy that could trigger an acceleration in inflation again.
Billionaire investor Jeffrey Gundlach has warned its "very likely" the Federal Reserve will go for outsized interest-rate increases as the US economy remains too hot.
The so-called "Bond King" was responding to Fed Chair Jerome Powell's congressional testimony Tuesday where he signaled rates may rise "higher than previously anticipated" given recent strong economic reports. Data showing a tight US labor market and high consumer spending has fueled speculation the central bank will need to continue its policy tightening to bring inflation down.
"After Powell's testimony today, the chances of a 50-basis point increase have gone up a lot in the betting markets," Gundlach said Tuesday during a DoubleLine investor webcast, per CNBC.
"We've had a very large increase in short-term interest rates and a further inversion of the yield curve. ... We don't need the Fed. All we need is the 2-year Treasury," he added, referring to a recent spike in short-dated Treasury debt rates. The two-year bond yield topped 5% this week for the first time since 2007.
Following Powell's speech, investors now see a 50-basis-point increase as likely at this month's meeting of the Federal Open Market Committee. That would mark a reacceleration of monetary tightening in the US, from February's increase of 25 basis points that was the smallest since early 2022.
At the same time, a key recession indicator is sounding its loudest warning ever. The inversion of the US bond curve - as measured by the difference between 2-year and 10-year Treasury yields - hit a record 103.5 basis points on Tuesday, pointing to heightened expectations of further rate hikes.
According to Gundlach, the fed funds rate has tracked the 2-year Treasury yield over the years. "It's now corroborating the idea that the Fed will probably take the fed funds rate up to 5% at the upcoming meeting," Gundlach said.
The only thing that could stop large rate hikes would be a weakening of labor-market data, he added.
"The only way that won't happen is if the employment data and the unemployment rate ... surprises to the downside. That has not been the pattern recently," Gundlach said. "If it comes in at or above expectations, I think it's a lock that the Fed's going to go with 50 basis points at a minimum."
Investors are now keenly awaiting the next set of key economic data for fresh cues on the central bank's future policy steps - US jobs data for February is due on Friday, while the inflation print for last month will be published next week.