Jeffrey Gundlach is of the opinion that interest rates are likely to become lower as the economy weakens and moves towards a recession in the coming year. On Wednesday, the Federal Reserve's rate-setting committee agreed unanimously that federal funds rate should remain within a target range of 5.25%-5.5%. Jerome Powell, Chair of the Federal Reserve, said on Wednesday that the rate-setting committee hasn't pondered cutting rates and will not do so until inflation is stabilized.
DoubleLine Capital CEO Jeffrey Gundlach believes interest rates will drop as the economy weakens and slides into a recession in the first part of next year. “I do think rates are going to fall as we move into a recession in the first part of next year,” Gundlach said on Wednesday's CNBC “Closing Bell" program.
The Federal Reserve maintained its current key federal funds rate of between 5.25% to 5.5%. This marks the second straight meeting that the central bank decided to keep rates unchanged, after eleven rate hikes in the past year.
Gundlach mentioned a few indications that an economic plight is underway, such as the slowly rising unemployment rate, the inverted 2-year to 10-year Treasury yield spread, and an initial wave of layoffs. “I really believe that layoffs are coming,” he remarked. “We've seen hiring freezes, and now we're starting to see layoff announcements … they're out there [for] financial firms and technology firms, and I believe that's going to spread.”
The "bond king" also sounded an alarm over the U.S.'s widening federal deficit, which has grown to nearly $1.7 trillion, and its soaring national debt of almost $34 trillion. “One thing that the market is going to have to confront is we cannot sustain these interest rates and this deficit any longer,” Gundlach said. “We can't afford this government that we're running at today's interest rate level. It's completely unsustainable.”
These sentiments were echoed by billionaire investor Stanley Druckenmiller the same day, who noted that America's historic reluctance to issue debt at low, long-term rates would lead to tough decisions on entitlement programs like Social Security in the future.
As for the Fed's next move, Gundlach said it won't match the current dot plot projections of one more rate hike this year. Fed Chair Jerome Powell said Wednesday that the rate-setting committee has yet to consider a rate cut, and will not do so until inflation is subdued.
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