Bond Giants Minerd and Gundlach Clash on Fed Policy Credibility

(Bloomberg) - Two bond market giants are diverging on whether the Federal Reserve is doing enough to tame inflation in the aftermath of the central bank’s interest-rate increase on Wednesday.

In one corner, there’s Scott Minerd, the chief investment officer of Guggenheim Partners, which oversees more than $325 billion. He said the Fed’s guidance that it will likely move more slowly through the rest of the year won’t help bring down price growth. He sees inflation ending at still-hot levels this year at between 5% and 6% -- well above the central bank’s target.

DoubleLine Capital CIO Jeffrey Gundlach, by contrast, said this week’s unanimous decision to raise its benchmark lending rate by another 75 basis points means the Fed is no longer “behind the curve.”

It all speaks to big market divisions stoking volatility in US Treasuries and across Wall Street.

“Did the action today raise questions about the Fed’s credibility in fighting inflation?” Minerd said Wednesday in a Bloomberg Television interview. “After this run up we’re getting in the stock market and the bond market right now, by next week we’ll be sitting around and questioning, you know, gee, are they really being credible?”

Gundlach, striking a conciliatory note, said Chair Jerome Powell has regained market credibility. A mild recession would be the “best possible outcome for all financial markets,” he said in interview with CNBC. DoubleLine manages $107 billion in assets.

The S&P 500 jumped 2.6% and the Nasdaq 100 soared by the most since November 2020 after Powell said the central bank would slow the pace of rate increases at some point after the the steepest back-to-back hikes since the 1980s. The fed funds rate, now in a range of 2.25%-2.5%, is at a level that most policy makers see as consistent with the long-term neutral rate.

Which view of the Fed’s inflation-fighting prowess ultimately wins out is the question looming over every asset class at the moment.

Recent signs have pointed to cooling price pressures, aligning with the view of Gundlach, who sees rates ending the year at 3%. Commodity prices have fallen in recent weeks, breakevens are well below their highs and US Treasury yields have declined across the curve. Coming into the policy gathering, exchange-traded fund investors offloaded their inflation hedges in a “vote of confidence” in the Fed’s campaign to cool the hottest inflation since the early 1980s.

The two investing titans are historic rivals, but they agree on one thing: That the lack of forward guidance going forward is likely to help reduce volatility in markets. Powell on Wednesday said the Fed would scrap explicit guidance on the pace of rate hikes, instead calibrating based on upcoming inflation data.

“Forward guidance was created in hell,” Minerd said. “I would blame forward guidance for the market instability that we’ve had over the last six months.”

By Sonali Basak and Katie Greifeld


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