Gundlach: Fed to Raise Rates ‘Until Something Breaks’

Starting next week, the Federal Reserve is poised to begin a number of back-to-back interest rate hikes “until something breaks” in the markets, DoubleLine Capital CEO Jeffrey Gundlach said in a conference call late Tuesday.

“There’s starting to become a sequential type of Fed pattern,” the bond king explained. “It’s almost old school.”

“Confidence in the Fed has really changed a lot,” Gundlach said. “The Fed has gotten a lot of respect,” with the bond market listening to it now that the central bank looks more likely to raise rates on a consistent basis than in the recent past.

The Fed is widely expected to raise the benchmark rate 0.25 percentage points. The DoubleLine executive believes there will be another two or three rate hikes later in 2017.

The Fed has “no more excuses” about why it cannot raise rates, he says. “And the bond market is showing remarkable faith in the Fed.”

Gundlach doesn’t foresee a recession on the near horizon, though equities could eventually weaken as rates spike.

Curve Ahead?

“Clearly, the yield curve has been flattening since July and post-election,” Gundlach said. “But it’s nowhere near inverted, so there’s room to go.”

On Wednesday, U.S. Treasury yields moved up after news that private-sector hiring topped expectations, thus boosting the likelihood of a hike in rates next week.

Yields on the 10-year Treasury increased 5.2 basis points to 2.56%, which is the highest rate since Dec. 27.

“Sentiment is short positioning to support a rally, but we’re really going sideways,” he said.

For his part, the DoubleLine exec sees these yields moving “up a bit” and then down to 2.25%. “We are still looking at a rally below 2.25% and then [moving] towards 3%,” he stated.

Gundlach added that “2.60% could be the high, though we could go higher if we get through the dead zone.”