“We have a problem with the amount of money we need to borrow and that will cause a strange movement.”
That’s Jeffrey Gundlach, the DoubleLine CEO speaking to CNBC, on how the next cutting cycle from the Fed may lead to a different experience for the broader economy.
Gundlach is not alone in warning about government spending, which Fed Chair Jerome Powell called unsustainable. The Congressional Budget Office forecasts federal budget deficits will total $20 trillion over the 2025–2034 period, and it’s unusual to see big deficit-to-GDP ratios, such as 6% last year, when the economy is expanding.
Gundlach said it’s “not at all implausible” that longer-term interest rates could go into the “high single digits.” He noted in the 1980s, real interest rates — that is, adjusted for inflation — reached 10%.
The yield on the 10-year yield
BX:TMUBMUSD10Y
is 4.29%, and the 10-year TIPS rate is right at 2%.
For Corporate America, rising interest rates will cause big problems. If the economy weakens but they aren’t able to refinance at lower rates, more companies will default. “So maybe it adds volatility to the economic cycle. And certainly that was the case when interest rates were rising in the 70s and 80s,” he said.
On January CPI numbers, he said the Fed discussion over non-traditional ways of measuring inflation such as three- and six-month annualized “came back to bite them.”
He said the market was too aggressive in pricing in six interest-rate cuts this year, and that the Fed will be cautious on monetary policy in an election year.
Also see: Here’s how well investors would’ve fared if they actually heeded the warnings of Soros, Gundlach and others.
