The Fed should reject its inclination to raise rates, according to Jeffrey Gundlach. It’s rare that he agrees with Larry Summers, but in this case the two believe that the fundamentals in the U.S. economy do not justify higher interest rates.
Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke to investors in a conference call on February 17. The call was focused on the release of the new DoubleLine Long Duration Fund, but Gundlach also discussed a number of developments in the economy and the bond market.
Signals of an impending rate increase have come from comments by Fed governors that the word “patient” should be dropped from the Fed meeting notes, according to Gundlach. That word has taken on special significance, he explained, since Janet Yellen attached a two-month time horizon to it.
“If they drop that word,” Gundlach said, “it would be a strong signal that rates would rise in the following two months.”
The Fed seems “philosophically” inclined to raise rates, Gundlach said, even though the fundamentals do not justify such a move. Strong disinflationary pressure coming from the collapse in oil prices should caution the Fed against raising rates, he said.
Gundlach was asked about comments by Gary Shilling that oil prices might go as low at $10/barrel. “We better all hope we don’t get $10,” he said, “because something very deflationary would be happening in this world.” If that is the case, Gundlach said investors should flock to long-term Treasury bonds.
“I’d like to think that the world is not in that kind of deflationary precipice,” he said.
Oil will break below its previous $44 low, Gundlach said. But he did not put a price target on oil.
Gundlach warned that by mid-year, if the Fed does raise rates, “the sinister side of low oil may raise its head.” At that time, lack of hiring or layoffs in the fracking industry could cripple the economy, according to Gundlach.
In the short term, Gundlach said that the recent rise in interest rates is a signal that the “huge deflationary scare” –which was partly because of Greece – has dissipated. Investors should monitor Spanish and Italian yields, he said. If they remain low, it is a signal that Greece is not leaving the Eurozone or that, if it does, “it is not a big deal.”