Gundlach says the bond market is signaling the Fed has to act on inflation
Jeffrey Gundlach, CEO of DoubleLine Capital, said the Treasury market is signaling that the Fed will need to do more than just talk tough if policymakers are serious about hitting its 2% inflation target.
“If you really want to get to 2 percent, I think you need to raise interest rates,” Gundlach said on CNBC’s “Closing Bell” program on Wednesday, following the Fed’s latest policy decision. “I think it will take a long time to get to 2%. We may not get there in the next few years.”
In a generally expected decision, the Fed left its benchmark interest rate unchanged between 3.5% and 3.75%. However, this move was not approved unanimously; Three policy members opposed in favor of raising interest rates by a quarter point.
Gundlach said divergent movements in the Treasury curve following the announcement showed investors’ doubts that the Fed would ultimately follow through.
“The two-year Treasury rebounded today because it feels like the Fed is taking its time,” he said. “And long bond yields rose significantly after the press conference because the bond market vigilantes are saying: ‘If you really want us to believe your narrative, you have to take action.'”
The benchmark 10-year Treasury yield increased by more than 7 basis points to 4.681%, while the 30-year bond yield reached its highest level since 2007 at 5.213%. Meanwhile, the policy-sensitive two-year Treasury yield fell 3 basis points to 4.244%.
The long end is generally tied to expectations for inflation and budget deficits, while the short end is closely tied to short-term interest rate expectations.
Fed President Kevin Warsh emphasized that the Fed will take the necessary steps to achieve the 2% inflation target.
“I understand this committee’s desire to continually forecast and comment, but from our perspective, we need to observe the market’s reaction to developments directly and unfiltered,” Warsh said. “Of course, I want to emphasize that the decisions of this committee are of great importance and that we will not hesitate to take action where necessary and appropriate.”
