Jeffrey Gundlach has never shied away from sharing his opinions about the market and economy. Indeed, the CEO and chief investment officer of DoubleLine Capital owes his current status as a fixture of the financial media scene in no small part to his always opinionated, and often pugnacious, market prognostications.
Gundlach shared his latest thoughts on the current state of the market, as well as his predictions for 2022, during DoubleLine’s Dec. 7 webcast. Of particular note were his thoughts on the Federal Reserve’s plans to tighten monetary policy in the year ahead.
Gundlach's prognosis
Gundlach has been beating the drum for years about the dangers of the extremely dovish monetary policy that has been employed under successive Fed chairs in recent years. Thus, one might think Gundlach would be happy to see that, after years of false starts and reversals, the central bank is finally poised to begin tightening monetary policy in earnest.
Fed Chair Jerome Powell has spent months stating his intention to begin raising interest rates next year. Powell’s comments following the Dec. 15 meeting of the Federal Open Market Committee reinforced this view, declaring plans not just to start raising rates, but to accelerate the pace of the hikes. The central bank now aims for three rate hikes in 2022. At the same time, it plans to taper bond purchases in order to throttle back runaway balance sheet expansion.
While the Fed’s more aggressive timeline may please some monetary hawks, I doubt they will assuage Gundlach’s doubts. After all, Gundlach expressed considerable skepticism toward the Fed’s ability to stick to its previous, less aggressive timeline for tapering, as he said on Dec. 7:
“[The economy] has the appearance of being strong because the strength comes from the stimulus, which has never been as extreme as it is right now in our time. We’re going to start seeing less stimulus to the economy…It’s likely that we will see economic problems with just a few rate hikes from the Fed. Maybe only four rate hikes or so. Maybe it’s one or one and a half on the Fed funds rate that breaks the economy…My base case is we’ll start to see trouble by the second half of 2022.”
According to Gundlach, the Fed has done a great deal to prop up the economy in recent years. This is a very real concern, as I have pointed out previously, since the Fed has been working overtime to stimulate economic activity and prop up capital markets since early 2020. Should the economy stall next year, Gundlach thinks the Fed will react with more dovish monetary policy.
My take
The Federal Reserve’s plan to increase the pace of interest rate hikes while accelerating efforts to taper its asset purchases has been a long time coming. Nonetheless, it holds considerable risks for an economy and market that have become dependent on loose monetary policy. Should the Fed withdraw these key sources of financial buoyancy, both the economy and capital markets might well begin to take on water. Should serious headwinds emerge in 2022, as Gundlach suspects, the Fed might well return to its longstanding dovishness once more.
