Interview with Geondeullak Doubleline Capital CEO
Amid growing concerns that fears of bank insolvency could lead to a credit crunch and rapidly worsen the economy, a forecast has emerged that the United States will face a recession within a few months. Calls have also been made to reverse course and cut interest rates to prevent a hard landing.
Jeffrey Gundlach, CEO of DoubleLine Capital and known as the "Bond King" of Wall Street, said in an interview with U.S. financial media CNBC on the 27th (local time) that "a U.S. recession will begin within a few months," and that a policy shift by the Federal Reserve (Fed) will be inevitable as a result. As the recession is expected to unfold faster than anticipated, the Fed will have no choice but to turn to interest rate cuts to reduce the possibility of a hard landing. He pointed out, "The headwinds from the aggressive tightening that has rapidly unfolded since last year are blowing, and as a result, the overall economy has become very vulnerable," adding, "The Fed must respond very dramatically."
He also said that the Fed will reverse course to cut interest rates within this year, expecting "two rate cuts this year." This outlook came as fears of bank insolvency triggered by the U.S. Silicon Valley Bank (SVB) have somewhat eased, weakening expectations for the Fed to hold rates steady. Although Fed Chair Jerome Powell reiterated at a press conference following the Federal Open Market Committee (FOMC) regular meeting on the 22nd that he does not foresee rate cuts within the year, the market is anticipating that starting from the July FOMC, the Fed will begin cutting the benchmark interest rate by 0.25 percentage points at each meeting due to warnings of credit tightening.
Gundlach said he does not expect the Fed to raise rates again until the U.S. 2-year Treasury yield, which has exhibited historic volatility since the SVB collapse, rebounds. After the SVB bankruptcy on the 10th, the yield plunged by a staggering 106 basis points over three days, marking the largest drop in 36 years since Black Monday in October 1987. Investor sentiment improved somewhat the day before when news broke that SVB would be acquired by First Citizens BancShares, causing a 25 basis point (1bp = 0.01 percentage points) increase, but the yield remains about 100 basis points lower than earlier this month.
Gundlach warned that if the Fed raises rates again in May, it could reignite the banking system crisis, increasing unrealized losses and causing greater repercussions. Following the SVB bankruptcy shock, rapid fund flows from bank deposits and stocks into money market funds (MMFs) have raised liquidity concerns for small and medium-sized banks. Gundlach emphasized that further rate hikes by the Fed would stimulate such fund flows and accelerate liquidity worries among banks.
Previously, Gundlach strongly criticized the Fed's passive response, stating in 2021 when U.S. economic leaders collectively asserted that "inflation is transitory," that the situation was likely to become a prolonged battle.
Some analysts have also diagnosed that even if the Fed reverses course to cut rates this year as Gundlach predicts, it will not be enough to avoid a recession. Paul Eitelman, Chief North America Investment Strategist at Russell Investments headquartered in Seattle, pointed out, "Market volatility is increasing due to financial sector instability and fear, and the difficult economic environment continues," adding, "The risk of recession remains very high." He further stated, "(For market outlooks to turn optimistic,) confirmation is needed that inflation is calming and wage growth is moderating."
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