New Bond King: The Federal Reserve's "No Rate Cut in December" is Powell's Worst Move

Recently, Jeffrey Gundlach, the CEO of DoubleLine and known as the "new bond king," sharply criticized the Federal Reserve's policies during a roundtable meeting, stating that Chairman Jerome Powell's decision to maintain interest rates in the December meeting was the "worst" of his tenure.

Gundlach pointed out that the Federal Reserve is currently in an awkward position, as Powell has only one policy tool to execute what he calls the "dual mandate" (the Federal Reserve's dual goals of maintaining price stability and maximizing employment) amid rising inflation above target levels and increasing unemployment rates. Gundlach stated:

"Powell is now standing with one foot on the dock and the other in the canoe, and when the two begin to separate, he will inevitably get wet."

Recent data over the past few months shows that the U.S. CPI has risen for five consecutive months. Gundlach believes the Federal Reserve seems to have returned to a state of over-correction, especially as this data indicates that the Fed has overly focused on short-term fluctuations while neglecting long-term trends, which is also the reason for the emergence of the "super core inflation indicator."

He believes that a contradiction is forming between Powell's two targets: inflation and unemployment. On one hand, although the unemployment rate is not rising rapidly, it is still slightly above the 36-month moving average, lighting up the yellow alert for an economic recession; on the other hand, inflation expectations may spiral out of control.

However, achieving a balance between the two seems difficult, which also means that one side will always have to make concessions. Gundlach stated, the side making concessions is unlikely to be the inflation rate. "Because I don't think a 2.5% or even 2.75% inflation rate is too big of a challenge for the Federal Reserve, but what if the unemployment rate continues to rise while the inflation rate remains at 2.5%, 2.75%, or even 3%?"

He pointed out that if Powell wants to prevent the unemployment rate from rising excessively, the U.S. will continue to face a sharply steepening yield curve, with the yield spread between 2-year and 10-year U.S. Treasury bonds shifting from -100 basis points to the current +40 basis points.

Gundlach emphasized that historically, during all periods when the Federal Reserve shifted to an easing policy, he has never seen long-term yields rise significantly during the process of moving from previous rate hikes to pauses and then to rate cuts. He criticized:

"The Federal Reserve (not cutting rates in December) was the worst experience."