New Bond King: U.S. inflation may reach 4% by the end of the year, but the Federal Reserve may be forced to cut interest rates and even initiate YCC

"New Bond King" Jeffrey Gundlach warned that, according to current trends, the U.S. CPI may exceed 4% by the end of the year. However, due to liquidity crises and external shocks to the U.S. government, the Federal Reserve may ultimately have to cut interest rates in a high-inflation environment, and even initiate Yield Curve Control (YCC).

On May 8, Gundlach stated in an interview with CNBC that the Federal Reserve conveyed only one message during the 45-minute press conference: There is too much uncertainty about the direction of interest rates, and we do not know what will happen. Considering the implication that the Federal Reserve will not assess based on "soft data," this means that when conditions worsen (forced rate cuts), the deterioration must be significant enough.

Gundlach warned that given the current situation, it is highly likely that the U.S. inflation rate will exceed 4% by the end of this year. In a high-inflation environment, the Federal Reserve may not be able to cut interest rates, as this could lead to greater long-term problems. But ultimately, the Federal Reserve may have to cut rates and even initiate YCC:

If interest rates become uncomfortably high, some exogenous shock may occur from the U.S. government, the Treasury, or the Federal Reserve, and they may implement yield curve control. This would be very difficult.

I do believe they will cut rates, but not because the inflation data has improved. Rather, it will be due to liquidity issues, and the Federal Reserve will ultimately cut rates.

Here are excerpts from the interview:

Steve Liesman:

Scott, I can summarize this entire 45-minute press conference into one question: Which direction do you lean towards? This was Powell's response.

Powell:

I don't think we can say how this will end. There is a lot of uncertainty.

For example, how will tariff policies be resolved? And when the tariff issues are settled, what will be the impact on the economy, growth, and employment?

I think it's too early to know now. So what I mean is, while waiting for further clarification on tariffs, our policy rate is in a good position.

Steve Liesman:

Scott, that's literally the entire press conference. The rest, as they say, is just commentary.

The only standout point in the statement is that the Federal Reserve indicated that the risks on both sides have increased, with the risks of rising unemployment and rising inflation being equal. This is the issue the Federal Reserve must deal with, and it is now waiting to find a way out.

It's worth summarizing. The Federal Reserve will not assess sentiment data or soft data. It will wait for signals to appear in hard data. Yes, the Federal Reserve will lag behind the curve, but as Jason Furman (former Deputy Director of the National Economic Council) said in an article in The New York Times, this mitigates the risk of the Federal Reserve being ahead of the wrong curve.

Jeffrey Gundlach:

Interesting, this is again a matter of the Hippocratic Oath.

Scott Wapner:

Steve, thank you for your good points. Of course, I now want to ask Jeffrey about this issue, Steve Liesman, who asked the real question today

Jeffrey Gundlach:

Steve is absolutely right, this question is one he asked directly. The answer is clearly, as Steve said, this is all you need to know from the entire press conference, six people tried the same question, and the answers were basically the same,

basically they said, we don’t know. There’s too much uncertainty. This phrase is used frequently. We can’t even tell you what we’re looking for, but when we see it, we’ll know, when we see it, we’ll know, which means it has to be something “eye-opening” enough that you run into a tree.

Scott Wapner:

Are you suggesting they should cut rates now?

Jeffrey Gundlach:

I think our inflation model is quite relaxed because it incorporates energy prices. Energy prices are very low, below $60, however, when we make our best guess, it’s tricky, Powell said to figure out the impact of tariffs, you need to make some assumptions based on what’s said, and then you have to make assumptions again because there are other narratives. But we now believe that the baseline is that given current conditions, this year’s CPI will likely end in the 4s.

Jeffrey Gundlach:

So I don’t think they should cut rates in this context. If they cut rates and inflation rises, I think that would pose real problems in the long run.

What I’m really worried about is if rates become disturbingly high. The U.S. government, the Treasury, or the Federal Reserve might experience some kind of exogenous shock, and they might implement yield curve control. That would be very difficult.

Scott Wapner:

Do you think they will cut rates this year?

Jeffrey Gundlach:

The last time we talked, I said I thought they would cut twice. Throughout this year, the market pricing has been far beyond that. There was once pricing for five cuts.

I think the current pricing is 2.5 cuts, and there aren’t that many Fed meetings left.

I do believe they will cut rates, but I don’t think it will be because the inflation data gets good. I suspect the unemployment rate will be shockingly high in the short term, like in the coming months. I think due to some liquidity issues, the Fed will ultimately cut rates.