Jeffrey Gundlach on Kevin Warsh and a New Era at the Fed | CNBC
Jeffrey Gundlach analyzes Fed Chair Kevin Warsh's inaugural press conference, noting a significant shift in Fed communication and policy emphasis toward price stability. Gundlach discusses the implications for interest rates, bond yields, and equity markets, suggesting the Fed may be less tied to the two-year Treasury and that rate cuts are unlikely before fall.
Summary
Jeffrey Gundlach, CEO of DoubleLine Capital, provides detailed analysis of Kevin Warsh's first press conference as Federal Reserve Chair. He observes that Warsh's central message is an unwavering commitment to "price stability," which he emphasizes repeatedly throughout the conference. Gundlach notes that Warsh's announcement of five consultant task forces suggests the Fed is buying time, with work likely extending into fall, implying no rate changes before then.
Gundlach highlights an important semantic shift: Warsh's focus on the number to the left of the decimal point (targeting 2%) rather than the full 2% figure. Gundlach humorously suggests this could allow inflation up to 2.99% while still claiming price stability—a significant rhetorical shift. He notes one of the task forces focuses on inflation statistics frameworks, suggesting potential for new methodologies that could facilitate claims of achieving price stability.
A major theme is the potential decoupling of Fed policy from the two-year Treasury, which has historically guided Fed decisions for 20 years. Gundlach references a JP Morgan chart analyzing 55 years of Fed decisions, noting that Paul Volcker operated independently of the two-year Treasury in the 1970s-80s, sometimes raising rates when market conditions suggested otherwise. He suggests Warsh may emulate Volcker's independence.
On inflation forecasts, Gundlach reiterates his prediction that May CPI would have a "four handle," which proved correct. He projects inflation could fall to 3.5% or lower by year-end based on commodity prices. However, he emphasizes the mathematical difference between 2% and 3% inflation targets, explaining that achieving true 2% over 25 years would require essentially zero inflation for several years.
Regarding investment strategy, Gundlach shifts his stance on long-term Treasuries, now favoring them due to Warsh's credibility commitment to price stability. He believes rate stability and potential tightening (if needed) will better anchor long rates and potentially improve mortgage affordability. He also notes that many traditional market indicators (copper-gold ratio, leading economic indicators, consumer sentiment) have diverged significantly since 2020 and no longer predict outcomes as historically expected.
On markets, Gundlach expresses concern about U.S. equity concentration (nearly 50% in 10 names), strong earnings driven by government spending, and the future funding challenge. He prefers non-U.S. and emerging market exposure, though cautions against momentum plays like Korea's stock market (up 125% year-to-date). He notes the dollar has been unusually stable and expects it to remain firm given the hawkish jawboning.
Finally, Gundlach addresses political pressure, expressing relief that Trump hasn't yet challenged Warsh's independence, though predicting future conflict is likely if rate hikes occur.
About this episode
DoubleLine CEO-CIO Jeffrey Gundlach joins CNBC’s Scott Wapner following Federal Reserve Chairman Kevin Warsh’s debut FOMC press conference, calling it the start of a new era. Mr. Gundlach’s key takeaways: Chairman Warsh repeated “We will deliver price stability” more than anything else, and his decision to buy time through five task forces rather than move rates suggests no action until at least the fall. Mr. Gundlach greets the inflation framework task force with some skepticism, noting it could open the door to measurement techniques that conveniently engineer a path to declaring price stability. On the dot plot, with nine members projecting a rate hike this year, he sees it primarily as jawboning – but effective jawboning. He also raises the possibility that Chairman Warsh might prove more Volcker-like in his independence from the two-year U.S. Treasury, rather than slavishly following it as his predecessors have done for two decades. On markets, Mr. Gundlach sees the hawkish tone as net positive for long-term Treasuries, arguing that a credible commitment to price stability actually provides better support for the long bond than the overeasing that had been driving yields higher. He remains cautious on U.S. equities – now approaching 50% concentration in just 10 names – and sees the funding burden of the AI capex cycle as the back side of the earnings story that markets have been celebrating. He remains most constructive on non-U.S. markets, particularly emerging markets (EM) equities and local currency EM bonds, which have been the best-performing asset class for U.S. dollar-based investors year-to-date. He closes with a pointed quip on Fed independence – thanking the stars that President Donald Trump is not running the Fed.
Key Insights
- Gundlach observes that Warsh's emphasis on looking to 'the left of the decimal point' on inflation (targeting 2% rather than 2.0%) could theoretically allow inflation up to 2.99% while still claiming price stability achievement, representing a significant semantic and policy shift.
- Fed Chair Warsh appears to be breaking from 20 years of Fed practice of closely following the two-year Treasury yield in setting policy, potentially emulating Paul Volcker's more independent approach from the 1970s-80s.
- Gundlach calculates that achieving true 2% inflation trending over the next 25 years would require essentially zero inflation from now until 2026, or 1% inflation for a decade, demonstrating the mathematical gap between 2% and 3% targets is much larger than commonly understood.
- Multiple long-standing market indicators that worked reliably for decades—including the copper-gold ratio for predicting 10-year Treasury yields, leading economic indicators, and consumer sentiment indices—have stopped functioning predictively since 2020, suggesting structural market changes.
- The U.S. equity market is highly concentrated with approximately 50% of S&P 500 gains driven by just 10 names, earnings are inflated by massive government spending, and future funding of that spending poses a structural challenge to equity valuations.
Topics
Transcript
[0:19] Joined as always now by Jeffrey Gundlach. He is the DoubleLine Capital CEO and the CIO, the founder of that firm. It's so good to have you on what is clearly a new era in the Fed as Chair Walsh laid out moments ago. What did you think? >> Well, there was a lot to digest there. He opened up by saying he's committed to moving the Fed forward. And then he laid out what that meant with those five consultant task forces, I guess is what I'd call them. I think he's buying [0:50] himself some time, but the the the real uh phrase of the day without any doubt is we will deliver price stability. He said…
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