The new Bond King comments on Waller's debut: He is actually staking his credibility on controlling inflation and will not be the "dovish chairman" many people hope for.
“New Bond King,” DoubleLine Capital CEO Jeffrey Gundlach said that the hawkish signals released by Warsh at his debut suggest that bets on an accommodative monetary policy may fall short, which reinforces the logic for holding long-term US Treasury bonds.
On Wednesday local time, Gundlach said in an interview with CNBC that Warsh's speech clearly conveyed determination to fulfill the commitment to price stability. Gundlach said:
His statements today are nothing like what people expected in the first quarter this year—a Fed Chair who would push for rate cuts.
He believes that Warsh has in fact staked his personal credibility on controlling inflation, greatly reducing the likelihood of significant rate cuts. Gundlach said:
There’s a new sheriff in town. I believe the reasons to hold long-term Treasuries are now even stronger.
The Fed’s hawkish signals overnight directly impacted the short end of the Treasury market, while long-term bond yields were sought after.
The 2-year Treasury yield jumped about 13 basis points in a day to around 4.21%. The 30-year yield meanwhile fell slightly by about 2 basis points, with the spread between the 2-year and 30-year suddenly narrowing to the lowest level in over a year.
(Spread between 2-year and 30-year US Treasury yields narrows to the lowest level in over a year)
Warsh's Debut Sets Tight Tone, Market Rate Cut Expectations Under Pressure
At his first press conference, Warsh repeatedly emphasized the price stability target with clear and firm language.
The Fed policy statement included the phrase “the Committee will deliver price stability,” which Warsh echoed several times during the briefing.
WallstreetCN mentioned that at the briefing, Warsh stated:
The commitment to deliver is steadfast, consistent, and unequivocal—I think this is an important message we have been missing for the past five years, and we will rectify it.
He also pointed out that the inflation rate has not returned to the 2% target for five years, with clear regret in his remarks.
This tone is tighter than some investors and economists had expected. Previously, as President Trump had repeatedly criticized former Chair Powell for keeping rates high, the market once expected that Trump’s personally nominated Warsh would lean toward a more accommodative stance.
In this meeting, Warsh also made a noteworthy decision: refusing to submit his individual rate forecast in the dot plot.
Warsh also hinted at plans for a broader review of the Fed’s communication framework.
This signal suggests he may intend a systematic adjustment to how the Fed communicates policy signals, though the specific direction is unclear.
Gundlach: Credibility Staked on Inflation, Strengthened Logic for Long Bond Buying
Gundlach believes Warsh’s strong statements have in effect created a self-imposed mechanism. Gundlach said:
If he cannot deliver what can be called ‘price stability,’ he has effectively declared today that he will be seen as a failure.
This reputational stake makes aggressive rate cuts or overly accommodative policies much harder to pursue from a political logic standpoint. Based on this judgment, Gundlach believes long-term US Treasuries now have greater allocation value.
His logic is: If the Fed sticks to a price stability orientation, the reinflationary pressure on long-term bonds from excessively loose policies will be significantly reduced. He said:
We don’t need to worry that overly loose policies or overly accommodative rates will exert further pressure on long-term bonds.
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