「New Bond King」 Gundlach: Fed Rate Cut This Year 'No Longer Possible'

Original Title: "New Bond King: Fed Rate Cut This Year 'No Longer Possible'"
Original Author: Dong Jing, Wall Street News

Translator's Note: Jeffrey Gundlach, known as the "New Bond King," is mainly recognized for his outstanding performance in the bond market, especially his expertise in predicting interest rate cycles, Fed policy, and economic turning points. After the 2008 financial crisis, the assets under management of his firm, DoubleLine Capital, rapidly expanded. He has successfully forecasted market trends multiple times, positioning himself as the successor to the previous "Bond King" Bill Gross. The following is the original content:

DoubleLine Capital's CEO Jeffrey Gundlach explicitly stated that the possibility of a Fed rate cut this year has largely disappeared. Stubborn inflation and interest rate market signals have collectively blocked the space for monetary easing.

On May 18, according to Bloomberg, in an interview with Fox News' "Sunday Morning Futures" program, Gundlach pointed out that the market had previously expected two rate cuts this year, but inflation data has consistently not cooperated. He bluntly said:

"In my view, with the two-year Treasury yield being nearly 50 basis points higher than the federal funds rate, a rate cut is simply not possible."

As mentioned in a Wall Street News article earlier, the U.S. April CPI surged 3.8% year-on-year, the fastest pace since May 2023, and Gundlach warned that the next CPI data will "start with a 4."

Meanwhile, the Iran conflict has driven oil prices sharply higher, further transmitting inflationary pressures to the U.S., exacerbating the already challenging price environment. Gundlach also issued warnings about various market risks such as stock market overvaluation and private credit risks, indicating that overall market risks are quietly accumulating.

Stubborn Inflation, Rate Cut Window Closes

Gundlach's assessment that the Fed cannot cut rates this year is based on two key factors: continuously surprising inflation data and clear signals from the interest rate market.

In April, CPI rose by 3.8% year-on-year, the highest increase in nearly two years, significantly exceeding the Fed's 2% policy target. Gundlach stated that DoubleLine's model indicates that the upcoming CPI data will "start with a 4," implying that inflationary pressure is not only not receding but rather showing a rising trend.

From an interest rate market perspective, the current two-year U.S. Treasury yield is about 50 basis points higher than the federal funds rate.

Gundlach believes that this yield curve structure itself presents a technical barrier to rate cuts—the market pricing has already reflected expectations of persistent inflation. If the Fed were to cut rates at this point, it would face serious credibility risks.

The oil price shock from the Iran war is another significant variable to consider. The rise in energy prices will directly feed into all components of the CPI, adding new resistance to inflation easing. Gundlach expects this upward trend to continue to be reflected in future inflation reports over the next few months.

Gundlach gave a direct assessment of the situation facing the new Fed Chair, Kevin Warsh: he took office at a "difficult moment."

Warsh is facing a complex scenario of high inflation, an oil price shock, and discordant market expectations right from the start of his term. The Fed's policy space is subject to multiple constraints—it cannot simply ignore inflationary pressures and cut rates recklessly, yet it also faces uncertainties regarding economic growth prospects.

Analysts point out that Gundlach's remarks suggest that Warsh has little room to maneuver in the short term for implementing a loose monetary policy.

The Speculative Concerns Behind the Stock Market Rally

Despite the macroeconomic turbulence, the U.S. stock market continues to perform "exceptionally well." Gundlach offered his own interpretation: it is precisely because the Fed has remained passive on inflation issues that the stock market has been able to sustain its rally.

"When the Fed does nothing about inflation, the stock market will surge all the way," he said. Corporate earnings continuing to exceed expectations have further fueled the market's speculative sentiment.

However, Gundlach also pointed out that the current stock market has internalized a considerable amount of risk. "Market valuations are very high, and there is a strong speculative atmosphere," he said. Despite earnings data consistently outperforming expectations, this situation itself is "fostering speculative fervor."

In terms of asset allocation, Gundlach stated that he has been "very, very bullish on commodities for about the last 3 years." He noted that bond yields are negative, predictions that the market has diverted interest from some speculative assets like Bitcoin, making it nearly impossible for investors to find attractive alternative options outside of stocks.

Gundlach once again issued a direct warning about the private credit market in the interview. When asked if he was concerned about this sector, he replied, "Of course, I am indeed concerned."

He pointed out that the private credit market has a concerning structural feature: "This market always seems to require new investors to enter." He believes that this may reflect the sponsor's greedy logic - "they just want to manage more and more assets."

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