Bond billionaire Jeffrey Gundlach says the Fed will only hike rates to 4.5% – and he sees an 80% chance of a US recession next year

  • Jeffrey Gundlach only expects the Fed to raise interest rates to a peak of 4.5%.
  • The DoubleLine Capital CEO said the inflation threat is fading and the US economy is faltering.
  • Gundlach put the chances of a US recession next year at 80%.

Jeffrey Gundlach has predicted an early end to the Federal Reserve’s interest-rate hikes, and warned the US economy will most likely tumble into a recession next year.

The US central bank hiked rates by 75 basis points to a range of 3.75% to 4% on Wednesday, marking its latest effort to tackle red-hot inflation. Fed Chair Jerome Powell said he expected further increases, and signaled rates could peak above 5%.

“I don’t think they’re going to be able to pull that off,” Gundlach told CNBC. “There are too many signs of the economy weakening already.”

The billionaire investor and DoubleLine Capital CEO said the Fed’s shrinking of its balance sheet, and recent declines in commodity prices, have relieved inflationary pressures. He added that a slew of economic indicators, including an inverted yield curve, are pointing to a US recession within months.

As a result, Gundlach suggested the Fed might only hike twice more, by a total of 75 basis points, and stop at 4.5%. He also predicted the consumer price index (CPI), a key inflation gauge, will drop to 4.5% by May, and could even decline after next year.

“If they get it from 9% in the past couple of months down to 2% by the end of 2023, it’s going to go negative I think,” he said.

Gundlach warned the US economy will probably suffer a painful contraction in the coming months.

“Recession is easily 60% in the next six-to-eight months, and for the year 2023, I’d put it more like at 80%,” he said.

The so-called “Bond King” said fixed-income assets offer better value than stocks today. He suggested investors anchor their portfolios with 10-year Treasuries, and scoop up riskier but higher-yielding mortgage-backed-securities, junk bonds, and emerging-market debt.

“By owning these securities, it allows you to buy this bombed-out credit market,” he said.

Gundlach also touted emerging-market stocks, as he expects a US recession and subsequent rate cuts to tank the dollar.

“Once that happens, I think you’re going to have a double whammy of outperformance of the equities and a currency appreciation potential, which could lead to some pretty eye-popping returns,” he said.

Read more: Goldman Sachs: These 20 stocks are boosting shareholder returns by aggressively buying back their shares, even as a recession gets more likely

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