With the Federal Reserve's "second pause" as expected by the market, Jeffrey Gundlach, CEO of Double Line Capital and the "New Bond King", believes that as the economy deteriorates further and enters a recession next year, the Federal Reserve will cut interest rates.
I do believe that as we enter a recession in the first half of next year, interest rates will decrease, "he said on a program on Wednesday
Just before Gonlac's remarks, the Federal Reserve announced on Wednesday that it would keep the benchmark interest rate unchanged and remain in the range of 5.25% to 5.50%. This is also the second consecutive meeting of the Federal Reserve to suspend interest rate hikes since September, highlighting its wait-and-see stance in the fight against inflation.
The Federal Reserve reiterated that if inflation rates continue to rise after slowing down since June, officials may still raise interest rates again in December or next year. In the latest FOMC statement, the Federal Reserve's description of economic activity has upgraded from "steady expansion" in September to "strong".
Powell also emphasized at the press conference that "we have not yet made any decisions on future meetings, and the view that it would be difficult to raise interest rates again after a pause is incorrect." In response to the expectations of rate cuts circulating in the market, he also responded that the Federal Reserve has not considered the option of rate cuts at all.
However, Gonrak pointed out some signs of economic slowdown. Firstly, although the unemployment rate is still very low, it is showing an upward trend. Secondly, the key interest margin between the two-year and 10-year US treasury bond bond yields has been hanging upside down for more than a year, and has recently begun to steepen, which is a sign of recession. Finally, he also saw a broader wave of layoffs.
I really believe layoffs are coming. We have seen a hiring freeze, and now we are starting to see layoff announcements... Financial and technology companies are both laying off employees, and I believe this situation will spread
Gunlak also issued a warning about the growing federal deficit. As of the end of the previous fiscal year in September, the federal deficit surged to nearly $1.7 trillion. The budget gap has exacerbated the staggering total debt of the United States, which is currently close to $34 trillion.
One thing the market will have to face is that we can no longer maintain such interest rates and deficits. At the current level of interest rates, we cannot afford this government. This is completely unsustainable
Billionaire investor Stanley Druckenmiller expressed similar concerns about government spending earlier on Wednesday. He said that in the past few years, the United States has chosen not to issue bonds at lower long-term interest rates, which will ultimately lead to difficult choices in the future, such as cutting social security and other welfare programs.
As for the next step of the Federal Reserve, Gonlac said that the central bank will not be as aggressive as the current dot chart signal, which suggests another interest rate hike this year.