(Bloomberg) — Doubleline Capital’s Jeffrey Gundlach said on CNBC that he expects a US recession will start in a few months, and that the Federal Reserve will need to respond “very dramatically.”
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“The economic headwinds are building, we’ve been talking about this for a while, and I think the recession is here in a few months,” Gundlach said Monday. “All we really need is the unemployment rate to go higher.”
The Doubleline Capital founder also said he anticipates the Fed will cut interest rates “a couple of times” this year. The overall state of the economy is “clearly weak,” he said.
On Monday, amid a more upbeat outlook for US banks, Treasury yields jumped and swaps traders were betting that a quarter-point rate hike is more likely than not at the central bank’s next meeting in May. Officials have been tightening policy for a year to battle inflation.
Gundlach said he doesn’t expect the Fed will lift rates until the 2-year Treasury yield “goes back up,” although he didn’t specify by how much. The rate on the maturity surged 25 basis points on Monday as investor sentiment improved, but it’s still down about 100 basis points from earlier this month.
If the Fed raises rates again in May, Gundlach said the difference “between what you can get on T-bills and what you can get in the banking system will grow.”
He warned that such a scenario would “counter-productively cause great shrinkage of liquidity in the banking system, maybe some more problems with unrealized losses,” he said.
Smaller banks in particular have been shedding deposits in recent weeks as customers shifted funds to larger institutions after the collapse of several US lenders. But banks broadly have been fighting for deposits as the Fed’s rate hikes have spurred investors to shift cash to higher-yielding products, like Treasury bills and money-market funds.
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