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Like the Market, Jeffrey Gundlach Feels the Fed Erred Yesterday

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Dec. 20 2018, Published 2:17 p.m. ET

Jeffrey Gundlach: Views on Fed hike

“Bond king” and DoubleLine CEO Jeffrey Gundlach has been quite vocal about the S&P 500 (SPY) heading for new lows. In Jeffrey Gundlach: S&P 500 Headed for More Lows, Fed Shouldn’t Hike, we highlighted why Gundlach believes the Fed shouldn’t have kept rates (AGG) so low for this long. He also said the Fed shouldn’t raise rates at its December meeting.

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Jeffrey Gundlach:Powell made two mistakes

We discussed in This, Not the Rate Hike, Spooked the Markets Yesterday how the Fed’s 25 basis point hike didn’t spook markets but Powell’s comments that he didn’t see the Fed changing the balance sheet reduction policy took the markets down. Gundlach told CNBC Powell made two mistakes during his news conference:

  1. suggesting that quantitative tightening is on autopilot, which undermined investors’ confidence in the Fed being able to take proactive and flexible measures to support the economy
  2. talking too much about economic modeling

DoubleLine’s deputy chief investment officer, Jeffrey Sherman, said the autopilot idea is “scary.”

Double tightening spooking the markets

Gundlach had stated that the unwinding of the balance sheet has been adding to the sell-off in equities (DIA). He says there’s a high correlation between central bank balance sheets and global equity markets. Gundlach also cited an Atlanta Fed study that calculates that unwinding $600 billion from the Fed balance sheet is equivalent to three interest rate hikes. He characterizes the combination of a rising US deficit and rising interest rates (TLT) as a “suicide mission” by the Fed.

This double tightening is concerning for the markets (IVV) and money managers alike.

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