Jeffrey Gundlach, CEO of DoubleLine Capital, said the U.S. Treasury market shows the Federal Reserve needs to do more than just tough talk if policymakers are serious about reaching their 2% inflation target.
“If we really want to get to 2%, I think we’re going to have to raise rates,” Gundlach said Wednesday on CNBC’s “Closing Bell” after the Fed’s latest policy decision. “I think it will take a long time to reach 2%. We may not reach it for several years.”
The Fed kept interest rates unchanged at a range of 3.5% to 3.75%, a decision that was widely expected. However, the policy was not approved unanimously, with three policy committee members voting against it in favor of a quarter-point rate hike.
Gundlach said the divergent movement in the Treasury curve after the announcement showed investors’ skepticism about whether the Fed would ultimately follow through.
“The reason the Treasury two-year bond rallied today is because we think the Fed is taking its time,” he said. “And after the press conference, long-term bond yields rose significantly because the bond market vigilantes were saying, ‘If we really want our rhetoric to be believed, we need to start taking action.'”
The benchmark 10-year Treasury yield rose more than 7 basis points to 4.681%, while the 30-year Treasury yield rose to 5.213%, its highest level since 2007. Meanwhile, the policy-sensitive two-year Treasury yield fell 3 basis points to 4.244%.
The long end is generally tied to inflation and budget deficit expectations, while the short end is closely tied to short-term interest rate expectations.
Federal Reserve Chairman Kevin Warsh emphasized that the Fed will take the necessary steps to achieve its 2% inflation target.
“While we understand the desire for occasional forecasts and comments from the committee, we need to observe the market’s reaction to developments directly and unfiltered,” Warsh said. “Of course, the decisions of this committee are very important and I would like to emphasize that we will not hesitate to act if necessary and appropriate.”
