Fed Holds Rates Steady: 'Bond King' Jeffrey Gundlach Says Central Bank Should Have Hiked, Others Back The Pause

(MENAFN- AsiaNet News)

• DoubleLine's Jeffrey Gundlach says the Fed should be hiking, pointing to a 4.75% two-year Treasury yield and a steepening yield curve.
• BlackRock's Rick Rieder and economist Betsey Stevenson say waiting is the right approach.
• Treasury Secretary Scott Bessent says further hikes would not necessarily be a policy error.

The Federal Reserve held its benchmark interest rate steady at 3.75% to 4% on Wednesday, largely in line with market expectations. Experts are now divided on whether it was the right call.

The decision passed 10-2, with the central bank noting that the economy is growing at a“strong pace.”

“Inflation remains elevated,” the Fed said in the statement.“The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal. The Committee will deliver price stability.”

DoubleLine Capital CEO Jeffrey Gundlach, known as the“Bond King,” said the Fed should be raising rates, pointing to the two-year Treasury yield and a steepening yield curve. Others, including University of Michigan economist Betsey Stevenson and BlackRock's Rick Rieder, said waiting is justified. 

Why Gundlach Is A Proponent Of A Rate Hike 

In an interview with CNBC after the Fed's policy decision announcement, Gundlach noted the inflation“problem” the U.S. economy faces. He said that the headline consumer price inflation is likely to edge higher as long as energy prices keep rising and it is“going to stay that way for a few months, maybe even five months, until we get to the point, perhaps, where you finally get some base rates rolling off for the April report that might be printed in May.”

On the flip side, he noted that nominal GDP is at 6%, but there are no indicators that the levels will sustain. Gundlach also highlighted the steepening yield curve, noting that yields edged higher following the Fed's press conference. 

“But I think the Fed should be raising interest rates based upon the 2-year Treasury being at 4.75%, and now the yield curve, in the wake of this news conference, actually steepening again,” he said. 

Why Some Experts Think 'Hold' Is Justified 

Stevenson said in an interview that the economy is not running too hot right now. The labor market is moving sluggishly, and unemployment is not too high.

“And so it may be the case that the economy's slowing, along with the rate increases that have already happened, will continue to slow this trajectory of upward prices, you know, to high inflation,” she said. 

This gives the Fed room to gauge what the economy can do on its own before raising again. She noted that the Fed cannot control rising energy prices and that an immediate rate hike could also jeopardize investment in artificial intelligence. Stevenson added that the Fed has also indicated that more likely than not,“they're going to raise rates again.” 

Rieder also believes that“patience is the right approach” from the Fed. He noted that while inflation remains high, the question isn't whether rates should go higher but“whether higher rates would actually address the inflation that remains.”

In a post on X, he said that the challenge the Fed is facing is that parts of the economy are moving at different speeds even as growth remains remarkably resilient in aggregate,“supported by a powerful investment cycle, but beneath the surface, parts of the economy that are more sensitive to borrowing costs are feeling considerably more restraint.” 

He also said that persistent pressures across energy, insurance, healthcare and education are unlikely to be meaningfully affected by another 25 bps rate increase.

“In some ways, the Fed is operating a house with one thermostat, but very different temperatures in every room. Turning it down further may make the rooms that are already cool even colder, without doing much to cool those that remain hot,” Rieder said. 

“That doesn't mean the Fed should become complacent,” he added, saying that the Fed should retain the option to tighten rates further if the underlying inflation trend deteriorates. 

U.S. Treasury Secretary Scott Bessent also said in an interview with CNBC on Wednesday that further Federal Reserve rate hikes would not necessarily be a policy error, adding that the Fed should keep an“open mind” about the supply shock from energy prices having a“transitory nature.” 

What Is Retail Saying?

One user said,“The Fed Warsh mentioned bond interest rate dropping and possible lower gas prices as reasons for not raising rates. High probability that the war ends before the midterms.”

Another user said,“Funny how the Fed preferred inflation gauge, the PCE, is being released tommorrow the day AFTER the FOMC rate decision meeting. Sitting on support, could get a nasty face ripper tomorrow.” 

A third user said,“Market is pricing in a 78.4% chance of a rate hike in December. More or less, for better or worse, the hike is mostly priced in. That probability was at 90% yesterday. Tomorrow's PCE could take a December hike off the table. If that's the case, this will run hard. If the market sees a rate hike after PCE, we are pretty much anticipating a hike anyways. Any dip should be momentary.”

Among ETFs tracking benchmark indexes, the SPDR S & P 500 ETF (SPY) was down 0.30% overnight amid 'bullish' sentiment. The SPDR Dow Jones Industrial Average ETF Trust (DIA) was trading higher at the time of writing, while the Invesco QQQ Trust (QQQ) slipped overnight, with both in 'bearish' territory. 

Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT) was up 0.53% amid 'bearish' sentiment. 

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