Rate Policy: Gundlach presses for December hike as yields diverge

Jeff Gundlach, founder of DoubleLine, argued on Wednesday that the Federal Reserve is falling behind market indicators by holding interest rates steady.

During an interview on CNBC's Closing Bell, Gundlach questioned the central bank's reluctance to act despite recent economic upgrades. He pointed to rising headline inflation and a strengthening commodity sector as key drivers for concern.

The dispute follows the Fed's October decision to leave rates unchanged. At the previous September meeting, the central bank raised the benchmark rate by 25 basis points. Gundlach had previously criticized that move, stating the bank should have increased rates by 50 basis points to address inflation more directly.

Current data highlights a widening gap between policy rates and market expectations. The Fed's overnight rate sits at 3.75% to 4%, while the two-year Treasury note yields approximately 4.7%. Gundlach identified this divergence as evidence that the Fed needs to tighten policy further. CME FedWatch data indicates an 85% probability of a 25 basis point increase at the December meeting.

Oil prices remain a central factor in Gundlach's analysis. U.S. crude traded above $100 per barrel on Wednesday. He stated that unless oil prices drop, a rate hike in December is necessary to maintain price stability. Fed Chair Kevin Warsh noted at the post-decision press conference that future decisions cannot be determined until more information is available.

Warsh also announced a modification to the Fed's 2027 and 2028 meeting calendars. One meeting in each year will focus solely on policy strategy without a vote on the fed funds rate. Gundlach said he would prefer the board to reduce the total number of rate-setting meetings from eight to six immediately. He argued that fewer meetings allow for better data filtering between decisions.

Gundlach's portfolio allocation remains unchanged following the October decision. He holds 30% in equities, favoring an equal-weight S&P 500 index to mitigate technology risks. The remaining assets are split among 30% bonds, 20% commodities, and 20% cash reserves.

Warsh reiterated that the Fed will continue using incoming data to guide its path toward the 2% inflation target. Gundlach maintained that the current economic environment demands a more aggressive response from the committee.