Gundlach says the Fed will hike rates next week to save face, but shouldn’t

Jeffrey Gundlach, CEO of DoubleLine Capital, believes the Federal Reserve will still pull the trigger for a small rate hike next week, despite the ongoing chaos in the banking sector that has prompted extraordinary bailouts from regulators.

“I just think the Fed isn’t going to go to 50 at this point. I’d say 25,” Gundlach said on CNBC’s Closing Bell on Monday. In order to maintain the credibility of the central bank, “they will probably raise rates by 25 basis points. I think that would be the last hike.”

The collapse of Silicon Valley Bank and Signature Bank in recent days – the second and third largest bank failures in US history – led some investors to believe that the Fed would hold off on rate hikes to ensure stability. However, Gundlach said the central bank will continue its promised anti-inflation efforts.

“That really throws a wrench in there [Fed Chair] Jay Powell’s game plan,” Gundlach said. “I wouldn’t do it myself. But what do you do in connection with all this news that’s happened in the last six months and then something happens that you think you’ve solved.

Traders put an 85% chance of a 0.25 percentage point rate hike when the Federal Open Market Committee meets March 21-22 in Washington, DC an estimate by the CME Group.

While Gundlach foresees further tightening, he doesn’t necessarily think that’s the right response at the moment.

“I think inflationary policy is back at play with the Federal Reserve…putting money into the system through this lending program,” Gundlach said.

Officials on Sunday unveiled a plan to support depositors at both failed banks. The Treasury Department provides up to $25 billion from its FX Stabilization Fund as a back-up against potential losses from the financing program. The Fed said it will also provide loans with maturities of up to one year for institutions hit by the bank failures.

The widely followed investor also warned that the rapid steepening of the US Treasury yield curve after a prolonged period of inversion is a strong indicator of an imminent recession.

“In all of the past recessions going back decades, the yield curve starts de-inverting a few months before the recession hits,” said Los Angeles-based Gundlach.