New Bond King: Fed rate cuts this year are "no longer possible"

DoubleLine Capital CEO Jeffrey Gundlach made it clear that the possibility of the Fed cutting rates this year has basically disappeared, with stubborn inflation and signals from the interest rate market jointly blocking the space for monetary easing.

On May 18, according to Bloomberg, Gundlach said in an interview on Fox News’ "Sunday Morning Futures" that the market had previously expected two rate cuts this year, but inflation data has never cooperated. He said bluntly:

"With the two-year U.S. Treasury yield nearly 50 basis points higher than the federal funds rate, a rate cut is, in my view, simply impossible."

The Wallstreetcn article previously mentioned that U.S. April CPI jumped 3.8% year-on-year, the fastest pace since May 2023. Gundlach warned that the next CPI data would "start with a 4."

Meanwhile, the Iran war has pushed oil prices up sharply, further transmitting to U.S. inflation data and making the already tricky price pressure even worse. Gundlach also warned of several hidden risks in the market, including high stock valuations and private credit risks, noting that overall market risk is quietly accumulating.

Stubborn Inflation, Rate Cut Window Closed

Gundlach judged that the Fed cannot cut rates this year, based on two main factors: the consistently above-expectation inflation data, and clear signals from the interest rate market.

April CPI rose 3.8% year-on-year, the highest increase in nearly two years, far exceeding the Fed’s 2% policy target. Gundlach said, DoubleLine’s model shows that the next CPI overall data will "start with a 4," meaning inflationary pressure not only hasn’t receded, but is tending to rise further.

From the perspective of the interest rate market, the two-year U.S. Treasury yield is currently nearly 50 basis points higher than the federal funds rate.

Gundlach believes this yield spread itself constitutes a technical barrier to rate cuts—the market has priced in persistent inflation expectations, and if the Fed cuts rates now, it would face a serious credibility risk.

The oil price shock brought on by the Iran war is another variable that cannot be ignored. Rising energy prices will directly permeate into various components of the CPI, adding new resistance to inflation falling back. Gundlach expects, this upward trend will continue to show in inflation reports in the coming months.

Gundlach gave a direct assessment of the situation facing new Fed Chairman Kevin Warsh: he took the position at a "difficult moment."

As soon as Warsh took office, he faced a complex situation of high inflation, oil price shocks, and divergent market expectations. The Fed’s policy space is constrained in many ways—it cannot ignore inflationary pressures and cut rates rashly, while also facing uncertainties in economic growth prospects.

Analysts point out Gundlach’s remarks imply Warsh has almost no room for easy policy in the short term.

Speculative Risks Behind Strong Stocks

Despite a turbulent macro environment, the performance of U.S. stocks remains "exceptionally strong." Gundlach gave his interpretation: it is precisely because the Fed has done nothing about inflation that stocks have continued to rise.

"When the Fed does nothing about inflation, stocks will soar," he said. Continued corporate earnings exceeding expectations have further fueled speculative sentiment in the market.

However, Gundlach also pointed out that the current stock market has already internalized a considerable degree of risk. "Market valuations are extremely expensive, and speculation is rampant," he said. Although earnings continually exceed expectations, this situation itself is "fueling speculative fever."

In terms of asset allocation, Gundlach said he has been "very, very bullish on commodities for about the past three years." He pointed out that real returns on bonds are negative, some speculative interest has been diverted by prediction markets from Bitcoin, leaving investors with almost no attractive alternatives outside stocks.

Gundlach again issued a warning about the private credit market in the interview, using direct language. When asked whether he was worried about the sector, he replied: "Of course, I am indeed concerned."

He pointed out that there is a disturbing structural feature in the private credit market: "The market always seems to need new investors to come in." He believes this may reflect the greedy logic of sponsors—they "just keep wanting to manage more and more assets."

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