Gundlach: Fed Needs to Hike in December

Bond investor Jeff Gundlach told CNBC on Wednesday that the Federal Reserve should raise interest rates at its December meeting. He argued that current market data indicates the central bank is moving too slowly to control inflation. Gundlach specifically pointed to the gap between the current policy rate and long-term bond yields as evidence that the Fed is behind the curve.

The Federal Reserve held its benchmark interest rate steady at its October meeting. The rate currently sits in a range of 3.75% to 4%. Gundlach noted that the yield on the two-year Treasury note trades around 4.7%. He stated that this difference suggests the Fed needs to increase rates more than it has already done. He referenced the Federal Reserve's post-decision news conference, where Chairman Kevin Warsh described a strong macroeconomic environment.

Gundlach expressed concern about rising inflation and commodity prices. He predicted that headline Consumer Price Index inflation could reach 4%. He observed that the commodity index is rising during a bull market. Gundlach asked why the Fed was reluctant to act given these conditions. He added that U.S. oil prices remained above $100 per barrel on Wednesday.

Market data supports Gundlach's view on future policy. According to CME FedWatch, there is an 85% probability that the Federal Reserve will raise rates by 25 basis points in December. The Fed stated in its policy release that it will use additional information to determine the correct policy to return inflation to its 2% target. Warsh reiterated at the press conference that future decisions cannot be determined immediately.

Gundlach also commented on changes to the Fed's meeting schedule. Warsh announced that one of the eight scheduled meetings in 2027 and two in 2028 will focus on policy strategy without a vote on the fed funds rate. Gundlach said he would prefer the Fed to hold only six rate-setting meetings. He explained that fewer meetings would allow more time for economic data to filter in between sessions.

The investment approach of DoubleLine's founder has not changed following the rate decision. Gundlach maintains a portfolio allocation of 30% in equities, 30% in bonds, 20% in commodities, and 20% in cash. Within the equity portion, he favors the equal-weight S&P 500 index to limit exposure to potential issues in the artificial intelligence sector. He said the recent rate hold did not alter this specific allocation strategy.