Gundlach Predicted the Fed’s 2018 Direction Change—What’s Next?

Gundlach on the Fed

While it’s anybody’s guess now whether the Federal Reserve will proceed slowly in terms of interest rate hikes in 2019, the situation looked to be the opposite back in December, when the markets were in free-fall mode mostly due to concerns surrounding a hawkish Fed.

Jeffrey Gundlach is against the Fed’s raising of rates when economic conditions don’t warrant such hikes.

Gundlach Predicted the Fed’s 2018 Direction Change—What’s Next?

Gundlach predicted the Feds change in direction

Gundlach stuck his neck out and said in December 2018 that based on bond market indicators, the Fed was unlikely to raise rates in 2019 and 2020. Based on the Fed chair’s and other members’ speeches YTD (year-to-date), it’s become quite clear that their narrative has changed from hawkish to dovish.

As reported by Bloomberg, the Fed’s vice chair, Richard Clarida, mentioned that the Fed might consider introducing a strategy that could make up for periods of below-target inflation with periods of above-target price rises. We discussed this in more detail in our series JPM Likes Gold, as Fed Might Let Inflation Overshoot Target. Gundlach doesn’t think the strategy makes any sense, but it might be done so that investors feel more secure if inflation starts to rise, which he thinks will be the case.

Fed to reduce rate hike forecasts?

Gundlach thinks that the Fed might reduce its rate hike expectations for 2019 while increasing them for 2020, implying to the markets that the weakness in the economy is short term. All eyes are on the Fed and its policy outlook as it starts its two-day meeting on March 19.

More than rate hikes, the markets will be looking for the Fed’s direction on bond buying. Currently, the markets aren’t expecting any rate hikes in 2019, which is in contrast to the Fed’s expectation of two rate hikes. The markets could rally if the Fed lowers its rate forecast.

Meanwhile, YTD, the markets are on a tear after a dismal fourth quarter. A large part of that is due to the Fed’s U-turn on its hawkish stance, which has now been replaced with a dovish one. YTD as of March 15, the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) have risen 12.6%, 10.8%, and 15.6%, respectively. NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron (MU), General Electric (GE), and Microsoft (MSFT) have risen 27.2%, 26.2%, 24.6%, 36.9%, and 14.1%, respectively, as of March 15.