Hike rates

Bond billionaire Jeffrey Gundlach says the Fed will only hike rates to 4.5% – and he sees an 80% chance of a US recession next year

The U.S. central bank raised rates 75 basis points to a range of 3.75% to 4% on Wednesday, marking its latest effort to tackle runaway inflation. Fed Chairman Jerome Powell said he expected further increases and reported rates could peak above 5%.

“I don’t think they can pull that off,” Gundlach told CNBC. “There are already too many signs of a weakening economy.”

The billionaire investor and CEO of DoubleLine Capital said the reduction in its balance sheet by the Fed and the recent drop in commodity prices had eased inflationary pressures. He added that a series of economic indicators, including a inverted yield curvepoint to a US recession within a few months.

As a result, Gundlach suggested the Fed could only hike twice more, by a total of 75 basis points, and stop at 4.5%. He also predicted that the consumer price index (CPI), a key indicator of inflation, will fall to 4.5% by May and could even drop after next year.

“If they go from 9% in the last two months to 2% by the end of 2023, it’s going to turn negative I think,” he said.

Gundlach warned that the US economy will likely suffer a painful contraction in the coming months.

“The recession is easily 60% over the next six to eight months, and for the year 2023 I would say more like 80%,” he said.

The so-called “Bond King” has said that fixed income assets today offer better value than stocks. He suggested investors anchor their portfolios with 10-year Treasuries and grab riskier but higher-yielding mortgage-backed securities, junk bonds and emerging market debt.

“Holding these securities allows you to buy into this bombed-out credit market,” he said.

Gundlach also touted emerging market stocks, as he expects a U.S. recession and subsequent rate cuts to push the dollar lower.

“Once that happens, I think you’re going to get a double whammy of equity outperformance and potential for currency appreciation, which could lead to some pretty eye-popping returns,” he said.