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Why Gundlach Thinks Rate Cut Would Increase Chance of Recession

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Jeffrey Gundlach: Fed took the lead from the bond market

Reuters reported that in a telephone interview over the phone yesterday, so-called “Bond King,” Jeffrey Gundlach, said that the Fed’s dovish turn at the June policy meeting took its lead from the bond market. He said the Fed is doing “what the bond market says, with a lag.” He added, “The bond market definitely helped to encourage the ‘Fed pivot.’” In an investor webcast on June 13, Gundlach had predicted that the Fed would probably not cut rates in June, but could later this summer. Based on his reading of the bond market (BND), he said the Fed could cut rates by a quarter of a percentage point two or three times this year.

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Fed’s dovish take

On June 19, as was widely expected, the Fed kept rates unchanged, but it indicated that it’s open to interest rate cuts. In the Fed’s June press release, it said, “in light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The US markets opened on a very strong note after the Fed’s dovish stance. On June 20, the SPDR S&P 500 ETF Trust (SPY) and the tech-heavy Invesco QQQ Trust (QQQ) closed up by 0.95% and 0.80%, respectively.

Gundlach: Rate cut won’t stop a recession

The Fed’s dovish stance is in response to the increased economic uncertainty and rising geopolitical risks. Gundlach told Reuters that for the Fed to cut interest rates in July, the economic data has to be weak. Currently, the fed fund futures imply that traders are pricing in a 100% chance of a Fed rate cut in July. Gundlach said if the Fed cuts rates in July, “They are basically admitting they are behind the curve.” He further said, “One interest rate cut is not going to forestall recession.” He added, “It increases the chances that we are headed into recession.” Historically, there is no evidence that rate cuts stop a recession. Gundlach believes that a cut from the Fed might actually be an acknowledgment that things are worse and they are behind the curve.

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