‘Bond King’ Gundlach Says Treasury Market Is Pressuring Waller to Back Up Fed Rate-Hike Talk
DoubleLine Capital CEO Jeffrey Gundlach, widely known in the industry as the “new bond king,” said Wednesday, July 29, that signals from the U.S. Treasury market showed Federal Reserve policymakers would need to take more substantive action than merely making hawkish statements if they genuinely wanted to achieve their 2% inflation target. “If they really want to reach the 2% inflation target, I think they have to raise rates,” Gundlach said after the Fed released its latest policy decision. “I think reaching the 2% target is going to take a long time. We may not achieve it for the next several years.” The Fed said Wednesday that it would keep its benchmark interest-rate target range at 3.5% to 3.75%, in line with the broad market expectation. Three Fed policymakers dissented at the meeting in favor of a 25-basis-point rate increase. At the post-meeting news conference, Waller said market-determined interest rates had risen since the previous meeting, both in nominal terms and after adjusting for inflation. That indicated policy had tightened even without action by the Fed. “That gives us some comfort,” he said. Investors interpreted Waller’s remarks as suggesting that the Fed might delay a rate hike. Gundlach said the divergent moves across maturities in the Treasury yield curve after the Fed’s decision reflected investors’ doubts about whether the central bank would ultimately follow through on its commitments. “The two-year Treasury rose today because the market thinks the Fed is stalling,” Gundlach said. “Long-term yields rose sharply after the news conference because the bond-market vigilantes were saying, ‘If you really want us to believe what you’re saying, you have to start taking action.’” Market data showed the benchmark 10-year Treasury yield rose by more than 7 basis points Wednesday to 4.681%. The 30-year Treasury yield surged to 5.213%, its highest level since 2007. Meanwhile, the rate-sensitive two-year Treasury yield fell 3 basis points to 4.244%. Long-term Treasury yields are typically linked to expectations for inflation and fiscal deficits, while short-term Treasury yields are closely tied to expectations for near-term interest-rate policy. Beyond Gundlach, other Wall Street professionals also expressed concern Wednesday about the Fed’s credibility if it continued to talk tough about rate hikes without taking action. Nomura said Waller’s apparent dovish bias and his vague explanation of the policy reaction function could weaken the Fed’s credibility in fighting inflation. Ben Emons, managing director of fixed income at Highline Asset Management and founder of FedWatch Advisors, said, “The Fed’s use of hawkish rhetoric without taking action is a convenient way to let the market make its own judgment and induce the market to tighten financial conditions for the Fed. But if inflation accelerates and the market again concludes that the Fed is slow to respond, this approach could backfire.”
“If they really want to reach the 2% inflation target, I think they have to raise rates,” Gundlach said after the Fed released its latest policy decision. “I think reaching the 2% target is going to take a long time. We may not achieve it for the next several years.”
The Fed said Wednesday that it would keep its benchmark interest-rate target range at 3.5% to 3.75%, in line with the broad market expectation. Three Fed policymakers dissented at the meeting in favor of a 25-basis-point rate increase.
At the post-meeting news conference, Waller said market-determined interest rates had risen since the previous meeting, both in nominal terms and after adjusting for inflation. That indicated policy had tightened even without action by the Fed. “That gives us some comfort,” he said.
Investors interpreted Waller’s remarks as suggesting that the Fed might delay a rate hike.
Gundlach said the divergent moves across maturities in the Treasury yield curve after the Fed’s decision reflected investors’ doubts about whether the central bank would ultimately follow through on its commitments.
“The two-year Treasury rose today because the market thinks the Fed is stalling,” Gundlach said. “Long-term yields rose sharply after the news conference because the bond-market vigilantes were saying, ‘If you really want us to believe what you’re saying, you have to start taking action.’”
Market data showed the benchmark 10-year Treasury yield rose by more than 7 basis points Wednesday to 4.681%. The 30-year Treasury yield surged to 5.213%, its highest level since 2007. Meanwhile, the rate-sensitive two-year Treasury yield fell 3 basis points to 4.244%.
Long-term Treasury yields are typically linked to expectations for inflation and fiscal deficits, while short-term Treasury yields are closely tied to expectations for near-term interest-rate policy.
Beyond Gundlach, other Wall Street professionals also expressed concern Wednesday about the Fed’s credibility if it continued to talk tough about rate hikes without taking action.
Nomura said Waller’s apparent dovish bias and his vague explanation of the policy reaction function could weaken the Fed’s credibility in fighting inflation.
Ben Emons, managing director of fixed income at Highline Asset Management and founder of FedWatch Advisors, said, “The Fed’s use of hawkish rhetoric without taking action is a convenient way to let the market make its own judgment and induce the market to tighten financial conditions for the Fed. But if inflation accelerates and the market again concludes that the Fed is slow to respond, this approach could backfire.”