DoubleLine Capital CEO Jeffrey Gundlach said the U.S. Federal Reserve has put itself in a corner and isn’t likely to raise interest rates anytime soon.
“We knew what was going to happen [at Wednesday’s Fed meeting] three or four weeks ago,” the bond guru said. “As for the June meeting, it’s the zombie Fed. The … meeting will be anything but live. It’s the walking dead.”
Looking at how the bond market sees the likelihood of a rate hike, Gundlach says there “is zero chance to raise in June and in July, it’s in the teens. The chance for September is now 25%.”
(Related: Fed Keeps Rates Unchanged, Sees Fewer Rate Hikes for Year)
“Again, this is a zombie Fed. That’s what it looks like for June and July,” he explained, adding that the possibility of a rate high “is highly correlated to the dollar,” which has been weakening.
The U.S. Federal Reserve is “in a corner,” Gundlach says, after setting up two parameters for rate hikes a few years ago – namely an inflation rate of 2% and an unemployment rate “that’s a moving target,” having gone from about 7% earlier to 5% today. “It’s a moving goal post,” he stated, “and …. at this point is destroying our credibility.”
“The parameters have been met – and things are much more complicated, as the Fed knows. But they’ve oversimplified the world in their communications and now are at odds with their own parameters. They’re itching to raise rates really, but the markets are not cooperating.”
Looking at U.S. GDP growth, “It’s been remarkably stable” year over year, according to the DoubleLine executive. “Real GDP is about 2%, and the nominal GDP level is at 4% or less.… This is a very low nominal GDP level to have the Fed raise rates. Most hikes in the past have been above 5%. It’s a very difficult environment for the Fed.”
The DoubleLine chief had sharp words for non-U.S. central bankers, who have been implementing negative-rate policies. “They are trying to fight deflation with deflation,” Gundlach said. “Negative rates are the definition of deflation.”
Furthermore, negative rates “are fatal” to the banking system, he explains, pointing to the shares of Deutsche Bank and Credit Suisse, that are trading “at all-time lows, meaning lower than in 2008 and 2009.”
Why? “This is happening today, because negative rates make it impossible for them to make money…. The banks are being bled to death,” Gundlach stated.
In contrast, “Safe sales are skyrocketing,” he said, explaining the negative rates make individuals want to hoard money rather than spend it.
“Deposit rates are lower, and savings are up, up, up,” the DoubleLine executive said, noting that consumption is not improving in many regions with negative rates. “This is wrong, wrong, wrong!” he said. “
“One day, the evidence will be sufficient to stop this policy chain by central bankers,” he shared. “And they seem to think they are not doing enough of it!” Gundlach went on to compare negative rates as a policy tool to boost the economy to “putting out a fire with gasoline.”