• Fed recently signaled possible interest rate pause – stronger US job market however, could thwart this
• Gundlach was already anticipating an interest rate pause in May
At its last interest rate meeting in early May, the Federal Reserve raised the US base rate – as expected by most of the market – by 0.25 percentage points to 5 to 5.25 percent. Even if the interest rate hikes have become smaller in the recent past, this was still the tenth rate hike as a result. However, this should have been the last, believes Bond King Jeffrey Gundlach.
Signals point to a pause in interest rates – Gundlach is convinced
In a tweet shortly after the US monetary authorities’ latest interest rate decision, the billionaire investor expressed his conviction that there would be no further interest rate hikes at the next meeting in mid-June. “The Fed will not raise interest rates again,” said Gundlach.
The Fed will not raise rates again.
– Jeffrey Gundlach (@TruthGundlach) May 5, 2023
In fact, the Fed also signaled that an increase in the key interest rate at the next meeting is not imminent. So she deleted a passage from her statement in which it had previously been said that further interest rate hikes were to be expected. At the press conference, however, Fed Chairman Jerome Powell made it clear that the monetary watchdogs would always be guided by current developments and were also prepared “to do more if monetary tightening should be necessary”. So he did not completely rule out further rate hikes.
In fact, the continued strength of the US labor market could necessitate further rate hikes in the fight against inflation. According to dpa-AFX, the higher wages are increasingly pushing into the large service sector, where they could become entrenched. “As long as it [auf dem Arbeitsmarkt] If there are no clear signs of a slowdown, the Fed will probably avoid clearly proclaiming the end of the rate hike cycle or even the prospect of the first rate cuts,” the news agency quoted the assessment of Helaba experts as saying.
How reliable are Jeffrey Gundlach’s predictions?
So should investors take Jeffrey Gundlach’s view that the US rate-hike cycle is over, or should they be cautious? As the investor himself said on Twitter in March, his assessments were wrong 30 percent of the time. However, that would still result in an impressive 70 percent success rate.
I predict the Federal Reserve will be cutting rates substantially soon.
I am wrong about 30% of the time so factor that into any decision making.
– Jeffrey Gundlach (@TruthGundlach) March 24, 2023
However, in the same tweet, Gundlach also predicted that the Fed would soon cut rates significantly. He did not explain in more detail which period of time falls under “soon” for him. In general, the market assumes that the US Federal Reserve will not make the first interest rate cuts until the end of the year at the earliest, and Gundlach said in an interview with “CNBC” in May that he also expects a reduction in the key interest rate by the end of the year. At the next interest rate meeting in June, however, this is not yet in sight.
So, could he be correct in his prediction of a rate pause? The bond professional had already made a similar forecast before the central bank decided on the key interest rate in March. At the time, he told CNBC that he thought a 25 basis point hike in the March interest rate decision was likely, but that there would be a pause after that. “I would think that would be the last increase,” Gundlach told the US broadcaster at the time. He cited the turbulence in the US regional banks as the reason. However, as has now become clear, these did not prevent the Fed from raising interest rates further in May. So Gundlach was wrong in his prediction.
In May, he also criticized the behavior of the Fed compared to “CNBC”. “I think I would call it a mistake,” he commented on the recent rate hike when asked by the moderator. In his opinion, the Fed should have done nothing, said Gundlach – especially since the turbulence at the US regional banks would only subside when there were interest rate cuts. However, he qualified that an increase of 25 basis points is such a small step that it hardly carries any weight in view of the current level of the key interest rate.
June 14 will show whether the Fed will also make “a mistake” at its next meeting and raise interest rates further, or whether Jeffrey Gundlach will be right with his forecast this time.
Editorial office finanzen.net
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