Gundlach Sees 50-50 Chance of Fed Raising Rates in December

  • Manager says financial conditions have already tightened
  • 'We should just get on with it,' SkyBridge's Nolte says

There’s a fifty-fifty chance the U.S. Federal Reserve will raise interest rates in December, according to Jeffrey Gundlach, co-founder of DoubleLine Capital.

Financial conditions have already tightened with the selloff in equities, Gundlach said in an investor webcast on Monday. The Federal Open Market Committee decided last week to keep its benchmark rate near zero and released a statement that put an unexpected emphasis on low inflation and an uncertain outlook for global growth. Gundlach, who co-founded DoubleLine in 2009, forecast “choppiness” in fixed-income markets, though he said yields won’t actually change much.

Gundlach, whose Los Angeles-based firm oversees about $80 billion, has been saying for months that the Fed may not be able to raise rates this year for reasons including a strong dollar. In Monday’s webcast, he pointed to data compiled by Bloomberg that show futures traders and investors putting the odds pf a move in December at about 50 percent.

Trading in federal funds futures on Tuesday implied a 18 percent probability the Fed will act in October. While Fed Chair Janet Yellen has said the central bank is likely to raise rates in 2015 if the economy expands as expected, she said last week that policy makers needed more time to assess the impact of the slowdown in China and other emerging economies on U.S. growth and inflation.

Ray Nolte, chief investment officer at fund of funds SkyBridge Capital, and Diego Ferro, co-chief investment officer at Greylock Capital Management  predict that the Fed will raise rates by the end of the year.

’Get On With It’

"Our view is we should just get on with it,” and the U.S. economy is sound, Nolte said in an interview. The Fed seemed to be reacting more to the markets than it was to the fundamental economic data, and that is worrying the markets, Nolte said. "I think we are on to October, and possibly, December, until we see a rate hike."

While the Fed should raise rates in October, it probably won’t do so until December, Greylock’s Ferro said. The “only thing" Yellen "has accomplished is to make the market more paranoid," he said.

Investors and money managers at Guggenheim Partners and Ashford Investment Management are looking to 2016 for the Fed to raise the benchmark overnight rate.

Gundlach’s $48.8 billion DoubleLine Total Return Bond Fund returned 2.4 percent this year through Sept. 21, beating 92 percent of peers, according to data compiled by Bloomberg. Over five years, it has returned an annualized 5.9 percent, outpacing 99 percent of rivals.

The money manager also oversees the 5-year-old DoubleLine Core Fixed Income Fund, which has returned 1.5 percent in 2015, beating 96 percent of comparable funds, Bloomberg data show. In the past five years, the $4.5 billion fund has outperformed 98 percent of peers.

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