‘Bond King’ Jeffrey Gundlach predicts lower interest rates in anticipation of recession in early 2024

Jeffrey Gundlach, founder of DoubleLine Capital

In a recent interview with CNBC, DoubleLine Capital Chief Executive Officer (CEO) Jeffrey Gundlach shared his perspective on the direction of interest rates and the impending economic landscape. Gundlach believes that interest rates are poised to decline as the US economy faces further deterioration and the possibility of a recession in early 2024.

Despite the economic challenges ahead, the US Federal Reserve's rate-setting committee recently maintained the key federal funds rate within a target range of 5.25 percent to 5.5 percent. This decision marked the second consecutive meeting in which the central bank chose to keep rates unchanged, following a series of 11 rate hikes, including four in 2023.

Gundlach, often referred to as the "bond king," pointed to several indicators signalling an economic slowdown. He noted that the unemployment rate, though still relatively low, has been on an upward trend. Additionally, the yield curve, measured by the spread between two-year and 10-year Treasury yields, has remained inverted for over a year and has recently started to steepen, traditionally viewed as a recession signal. Furthermore, he observed initial signs of layoffs, with hiring freezes and announcements of layoffs beginning to surface, especially in the financial and technology sectors.

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Gundlach also sounded an alarm regarding the growing federal deficit, which reached nearly $1.7 trillion by the end of the most recent fiscal year, ending in September. This expanding budget shortfall compounds the already staggering US debt total, which is approaching almost $34 trillion.

"One thing that the market is going to have to confront is that we cannot sustain these interest rates and this deficit any longer," Gundlach cautioned.

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Billionaire investor Stanley Druckenmiller shared similar concerns earlier, emphasizing that the United States missed opportunities to issue debt at low, long-term rates in the past. Druckenmiller's perspective suggests that the nation may soon face difficult choices, potentially involving cuts to entitlement programmes like Social Security.

Regarding the Federal Reserve's future actions, Gundlach expressed skepticism about the central bank's apparent aggressiveness, as indicated by the current dot plot, which suggests one more rate hike this year. Federal Reserve Chair Jerome Powell, however, clarified that the rate-setting committee has not yet considered a rate cut and will refrain from such action until inflation is brought under control.

The economic landscape is further complicated by ongoing geopolitical issues such as the Russia-Ukraine war and the Israel-Hamas war. Against this backdrop, Jeffrey Gundlach's insights and warnings serve as a notable contribution to the ongoing discussion about the future of interest rates and the potential challenges the US economy may face in the near future. As investors and policymakers monitor these developments, the path of interest rates and the broader economic situation will be closely watched to gauge the potential impact on financial markets and the well-being of the global economy.

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