Could the Fed’s Hawkish Stance Halt Economic Growth?

Gundlach: The Fed is on a “suicide mission”

DoubleLine CEO Jeffrey Gundlach feels that Fed hiking rates at a time of widening deficits could mean fiscal trouble, stating that “here we are doing something that almost seems like a suicide mission,” according to Bloomberg. He said interest rates are on an upward trajectory, while recent tax cuts and increased federal spending have set US debt to balloon toward 125% of GDP after 2030, adding, “It’s pretty much unprecedented that we’re seeing this level debt expansion so late in an economic cycle.”

Could the Fed’s Hawkish Stance Halt Economic Growth?

Fund managers are worried about hawkish policy

Gundlach is not the only major fund manager who thinks the Fed may have made a policy mistake. According to a Bank of America Merrill Lynch survey, 26% of respondents cited a hawkish policy mistake by central banks as the second-biggest risk for markets.

As they turned overweight on US stocks (SPY) (DIA) for the first time in 15 months, fund managers cited trade war risk as their number-one concern in June. They are worried that the Fed might tighten policy too much, which could lead to a depreciation of the US dollar (UUP) and eventually a yield curve (BND) inversion, prompting an economic slowdown.

Fed unfazed by trade wars fears

However, the Fed does not seem bothered by trade tensions. After the Fed’s meeting, chairman Jerome Powell stated that there is no evidence trade frictions are weighing on corporate behavior, saying that “we really don’t see it in the numbers. It’s just not there. But — so I — I would put it down as more of a risk.”

While trade war fears might not have translated into numbers yet, concerns remain very real for a number of market participants. In fact, on June 15, the Trump administration is scheduled to announce a final list of tariffs on China on imports worth $50 billion. While a Fed rate hike is detrimental to non-yield bearing assets such as gold, if higher interest rates indeed slow economic growth, gold prices (GLD) could benefit.