New Bond King: Bond Market Vigilantes Tell Fed to Act if It Wants to Curb Inflation

According to CNBC, Jeffrey Gundlach, CEO of DoubleLine Capital and known as the 'New Bond King,' said on Wednesday (29th) that the U.S. Treasury market is sending a clear message to the Federal Reserve (Fed): if policymakers truly want to bring inflation back to 2%, they must act, not just talk.

Speaking in an interview after the Fed announced its latest interest rate decision, Gundlach said, 'If you really want to bring inflation down to 2%, I believe you have to raise rates. It will take a long time to reach the 2% inflation target. We may not achieve it for several years.'

The Fed kept its benchmark interest rate in the 3.5% to 3.75% range, in line with market expectations. However, the decision was not unanimous—three policymakers cast dissenting votes, advocating for a 25-basis-point rate hike.

Gundlach noted that after the Fed's announcement, U.S. Treasury yields moved in divergent directions, reflecting investor skepticism about whether the Fed will actually take action.

He said, 'The 2-year U.S. Treasury rose today because the market thinks the Fed is still on hold. After the press conference, long-term Treasury yields clearly rose, because the bond market “vigilantes” are telling the Fed: “If you really want us to believe your words, you must start acting.”'

The 10-year Treasury yield rose more than 7 basis points to 4.681%. The 30-year bond yield climbed to 5.213%, the highest since 2007. Meanwhile, the 2-year Treasury yield, most sensitive to monetary policy, fell 3 basis points to 4.244%.

Typically, long-term yields reflect market expectations for inflation and fiscal deficits, while short-term yields more directly reflect expectations for near-term interest rate policy.

Fed Chair Kevin Warsh emphasized during the press conference that the central bank will take necessary measures to ensure inflation returns to the 2% target.

'I understand there is external desire for the committee to provide consistent forecasts and commentary, but for us, we need direct and unimpeded observation of how markets react to developments. I reiterate: the committee’s decisions carry significant weight. When necessary and appropriate, we will not hesitate to act,' he said.