The Federal Reserve won’t preemptively raise interest rates to suppress inflation, said Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP.
“That is just not going to happen as long as we’re in this debt morass,” Gundlach said today at a conference in National Harbor, Maryland, held by the Investment Management Consultants Association, a membership group for brokers and investment advisers.
“With all of this debt building up, one thing that’s been saving us is the interest rate on the debt has been collapsing,” Gundlach said. U.S. federal debt has risen to more than $15 trillion in 2011 from about $863 billion in 1980, according to the Federal Reserve.
The Fed has held the federal funds rate at near zero since December 2008. In January the Federal Open Market Committee said economic conditions will probably warrant holding rates “exceptionally low” through 2014.
Raising rates would be “like shooting yourself in the head,” Gundlach said. Los Angeles-based DoubleLine manages more than $32 billion, primarily in fixed income. Treasury 10-year yields fell to 1.93 percent yesterday from about 4.64 percent five years ago, according to data compiled by Bloomberg.
Gundlach’s DoubleLine Total Return Bond Fund returned 10.3 percent in the last year, beating about 99 percent of rivals, Bloomberg data show. Investors deposited about $15 billion into the fund over the last year, according to Chicago-based data provider Morningstar Inc. The fund held about 79 percent of assets in mortgage-related securities as of March.
Some areas of the economy, such as home prices and wages, aren’t currently exhibiting inflation while others, such as commodities, are, Gundlach said. The S&P/Case-Shiller index of property values fell 3.5 percent through February from a year earlier, the smallest 12-month drop since February 2011, a report from the group showed today in New York.
Inflation was about 2.7 percent for the year through March before seasonal adjustment, according to the Bureau of Labor Statistics.
Investors may want to hold investments that perform well during deflation, such as government bonds, in addition to investments that will rise in an inflationary environment, such as mortgages and natural gas, Gundlach said.
“There is a massive policy change coming in this country,” to deal with the U.S. debt, which may include raising taxes on the wealthy, he said.