Headline inflation will breach 9% this year, according to Jeffrey Gundlach. That will force the Fed to aggressively raise the Fed funds rate.
With the nominal Fed funds rate near zero and inflation at 7.5%, the real Fed funds rate is -7.4%. It hasn’t been that low since the 1970s. With commodities up significantly, he said, “the inflation rate will not peak at 7.5% and could certainly be 9% and maybe 10%.”
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“If we get 9% CPI,” Gundlach said, “I can’t possibly see how the Fed will pull back on fighting inflation.”
Gundlach spoke to investors via a webcast, which he titled “Convoy,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.
The title of his talk was originally meant to relate to the convoy of Canadian truckers protesting COVID restrictions. Gundlach was struck that the normally “gentle” Canadians would protest in that manner. More recently, he said it related to the runaway rise in commodities prices.
But it now signifies the darker image of the 40-mile Russian military convoy stalled outside Kyiv.
Inflation Woes
The Fed has been ineffective at fighting inflation he said. As a result, bonds are “incredibly” overvalued with nominal rates at 1.85% and inflation at 7.5%.
Everyone expects the Fed to be deeply committed to being “on the job” to stop inflation, he said, and the Fed is hearing that message.
The headline CPI of 7.5% will be where we end the year, he said, making it two years in a row with high inflation. “It will make the Fed’s 2% target look laughable.”
Ports remain congested on both the east and west coasts, he said, which is another reason not to expect a rapid relaxation of inflation. It will also be hard to recruit truck drivers, Gundlach said, which is partially due to the trends toward robotization and driverless vehicles. Nobody wants to train to be a truck driver if their job will be obsolete in a decade.
Inflation is a global phenomenon and for foreigners, it is more problematic, as their currencies are depreciating relative to the dollar. The DXY (“Dixie”) trade-weighted index of the dollar has risen by several percent since the start of 2022.
Home prices remain strong, he said, with about 20% annual growth based on the Case Shiller index. But the CPI shelter index is up only 4.2%. Apartment rates are up 10% annually. Housing inflation will “start bleeding into inflation,” he said, “and offset improvements in the supply-chain disruption.” (For an alternative take on this issue, go here.)
Read the full article here by Robert Huebscher, Advisor Perspectives.
