Let's bring in our headliner as we always do. He's Jeffrey Gundlach. He's the CEO, the CIO, and founder of DoubleLine. He joins us from Los Angeles as always. Welcome back. It's good to have you.
Good to be with you again, Scott. It's been a while with Jay Powell. It's been a long ride. I think this is our 43rd time talking about the post-FOMC situation. And I think the words of the meeting, certainly the legal battle, was something we haven't heard before and he wanted to take a parting shot on that it seems, but also it's a little bit hawkish on inflation misbehaving. And he said, if you blinked you missed it, but he basically said if the tariff effect doesn't fade in the next quarter or two and if oil prices remain challenging, we won't even think of reducing interest rates. So, it's not surprising that we saw rates back up, the yield curve flatten in a bearish fashion with two-year Treasury yields going up about 10 basis points after that meeting. And now the 2-year Treasury yield is above the high end of the Fed funds rate. It's almost at 4% now. I suspect it will go to 4%. And it looks like the 30-year Treasury is settling in moving up to about 5%. So the bond market has started to price in higher inflation lasting longer and we think that's absolutely appropriate. We think that based upon the commodity complex right now that the year 2026 will end up in the high 3s for the headline CPI and we might even see, based upon where oil is right now and that will affect inflation for the next couple of months, we might see a four handle on the CPI in a month or two. And that clearly suggests that the Fed cannot be cutting interest rates right now.
So it's been an interesting period in the bond market. The Treasury market's been so stable. Yields haven't really changed in a year at many parts of the yield curve. And year to date, virtually every bond sector that's a traditional sector like high yield, bank loans, investment grade, mortgage-related securities, treasuries, they're all negative on a total return basis, particularly with the down prices today. And so the only thing that's actually up in the bond market is local currency emerging market debt which has a small positive rate of return in a context of other bond sectors being in the worst performer is bank loans down about 2.2% on the bank loan ETF and everything else is down about a half a percent or so and it's been very, very stable. I don't take the stability in the interest rates as likely to endure for the remainder of 2026. It has just been stable for such a long period of time. Last year we were marveling at the fact that the WTI curve was predicting no change in the oil price going forward a year. The oil price was projected by the WTI curve to be $56 plus or minus a dollar for months on end. And then all of a sudden that stability got completely shattered obviously by the war situation and so now oil is up tremendously. So the number one performing asset class if a traditional asset class really is the Bloomberg commodity index which has had a tremendous run this year, it's up a tremendous amount.
But I think investors should hold on to commodities at this point in time. I'm not really that fond of gold in the near term. It peaked out at about 5,500 and after the vertical rise up from 3,500 I wouldn't be surprised if gold went down below 4,000 before resuming its rise higher. So, I had been recommending that investors own a commodity index like the Bloomberg commodity index type of thing and also a little dollop of gold directly in there with the XAU or whatever it is and you could have an overweight to gold. I don't recommend that right now. I think there's going to be a cheaper entry point, but commodities broadly certainly seem strong. Obviously, that's been powered by the energy sector since the war started.
Yeah, as you would expect. So on both of those notes, Jeffrey, the dissents to which David Kelly earlier, and I know you respect his views and you cite him often in our conversations, called those the Fed's Declaration of Independence as they look ahead to a new chair and in a sense holding the line, saying we're not going to be moved by any political winds or anything else that are blowing in the direction of wanting us to do one thing or the other. So, what was your take on that before we get to Powell's decision to stay?
Yeah, I mean they I think they cleared the decks really. You know, they've been having this easing bias and I guess they still have that in the statement, but based on the press conference and those three dissents, it's pretty clear that they want to be truly sort of viewed to be neutral in terms of a bias. I don't they say there's an easing bias, but it didn't feel that way in the press conference. I felt like there's more of a tightening bias at this point. And that's married as well to the 2-year Treasury heading towards 4%. I mean, that's suggesting that there should be a hike sometime between now and the end of the year. I remember in our earlier visits here in the first two Powell press conferences, I pointed out back in January, I didn't think there'd be a rate cut this year. And then the last time we met I said if all you got for wanting risk assets is that you're banking on two rate cuts this year, you're backing the wrong horse. And that has certainly turned out to be the case. I mean the warp function on the shape of the yield curve suggests that there's just no rate cut this year. And I wouldn't be surprised if it starts skewing towards a rate hike. If the inflation numbers start, if we get a four handle on the CPI, I think there's going to be a lot of people talking about inflation is not close to 2%. I mean, inflation on the core CPI actually tracked for a couple of decades right along the 2% line. And then after COVID, we had a two or three years of on average 5% inflation. And in the years since 2023, it's already averaging 3% inflation, and we're going to go into the mid-3s at a minimum as we move forward in 2026 based upon this energy shock. And so I just don't think that there's a case for an ease between now and the end of this year, unless something bad happens.
Do you actually think there could be a hike?
Forgive me for interrupting you, but do you actually believe there could be a hike?
I would I think the odds of a hike between now and year end are better than the odds of a cut. And I think that's going to come further into focus as we move forward. This oil situation is just going to last longer than people are hoping for. Brent is up at $120. A lot of the actual transactions that are not in the futures markets are trading at higher levels than that. And there's a real problem here. And so we know that the food prices are very likely to go up once again because fertilizer prices are way up and of course the cost of transporting the food items is going to go up substantially. It's already gone up and it's going to be sticky based upon this enduring war. You know, they always say the boys will be home by Christmas when we go into a war and it never seems to be the case. So I just remember the Ukraine war. The idea was that Russia was just going to roll over them in two or three weeks and that would be the end of it. Here we are years later and we're still involved there. People have forgotten about that. The other issue that is on my list of worries is we've blown up a lot of our weapons stockpiles. You know like the Tomahawks, we've fired a third of the stockpile. Some of the other missiles we've blown up half of them. And it takes a while to recreate this stuff. I saw a comment that somebody was someone from the administration or a government official anyway was saying that if China wanted to get aggressive on Taiwan, it's not clear that we would be in a position to mount a defense if we so decided to do because our weapon stockpile is so drawn down. So I think that unfortunately I think this oil spike is going to be with us for quite some time and that inflation forecasts have to go up.
So, if they do, I mean, what does that mean for Kevin Warsh? And what kind of Fed chair do you think he'll be?
I think he's been clear on one thing for sure, and that is he doesn't like forecasting the future or giving hints of what the Fed's going to do. He doesn't seem to like the dot plots. I don't like the dot plots myself. I think it's almost embarrassing that every time they do a dot plot, they say in two years, last time it was three years because they had to back off the two years, but always used to be in two years inflation will be at 2% per the dot plot. Now this time was in three years. But I think he's going to not want a lot of I think he might cut back on the press conferences. That really wouldn't bother me that much. I kind of think every six weeks. I kind of like it when the press conferences when they skip a meeting, you know, like in the summertime, so you actually have a little bit longer period between the meetings, so you get more information. I think there's a little bit too much information that comes from the Fed, frankly. Too many opinions. I think he's going to want to be more of a primary spokesperson and discourage other Fed governors from speaking their mind on something of a regular basis. And I kind of favor that. I think nobody knows the future. Nobody knows what's going to happen two, three years from now on the inflation rate and the unemployment rate. You just have to work in real time. And he has spoken that way and I respect him for that. I mean, I liked Jay Powell. I didn't think he was the best Fed chairman ever. I thought he was too late. He was certainly too late on hiking rates in 2021. And I remember when they finally went the 25 basis points, I said, you know, painter, get off the ladder. Let's do 200 basis points right now. And then in 2024, you know, they were way behind the Treasury bond market. They were 175 basis point spread between the Fed funds rate, the 2-year Treasury rate was 175 basis points below. And amazingly, after all these rate cuts, 175 basis points of rate cuts, the yield curve is up since the first rate cut by the Fed, since the day of the first rate cut by the Fed. The 2-year, 5-year, 10-year, 30-year, they're all higher. And in fact, the 30-year Treasury rate has never been lower since they started cutting interest rates. It's been higher the whole time by most of the time by about 100 basis points. And I've been talking about how I don't really like the long-term treasuries. I'm a little less strident in that opinion right now. In fact, today after the announcement and after the bond market sold off, we actually bought some treasuries, intermediate term treasuries. I didn't buy 30-year treasuries, but we bought some treasuries in the sort of the middle part of the yield curve thinking that even though inflation's going higher, we've got rates now that even if inflation goes to 4%, you buy the 5-year Treasury, you're actually getting higher than 4%. And you roll down the yield curve on that. So you might get a little bit of a gain just by the passage of time. So I do think the chances of a rate hike because of the inflation problem, which Jay used the word misbehaving, the probability of a hike is greater than that of a cut.
