Gundlach warns oil above $100 means Fed must hike in December

The yield on the two-year Treasury note stands at 4.7%, a level that DoubleLine founder Jeff Gundlach argues exposes a growing disconnect in Federal Reserve policy. On Wednesday, the investment manager told CNBC’s “Closing Bell” that he does not understand why the central bank is pausing after recent economic data. He directed his question to Fed Chairman Kevin Warsh, who had just described a strong macroeconomic environment during the post-decision news conference. "What are you waiting for? You just upgraded the economy right here," Gundlach said.

Gundlach points to rising commodity prices and accelerating inflation as the primary drivers for further monetary tightening. He projects that headline Consumer Price Index inflation is moving toward 4%, a level that contradicts the Fed’s stated goal. The central bank held interest rates steady at its October meeting, following a 25 basis point increase in September. Gundlach believes the Fed should have implemented a 50 basis point hike in September to address the momentum in the economy. He stated that the current pace of gradual increases is insufficient for the prevailing conditions.

The gap between the Fed’s current policy and market expectations is widening. The overnight rate currently sits in a range of 3.75% to 4%, which is roughly 90 basis points lower than the two-year Treasury yield. Gundlach views this inversion as a clear signal that the Fed is behind the curve. He noted that markets have already priced in further action, with the CME FedWatch tool indicating an 85% probability of a 25 basis point hike at the December meeting. The Fed stated it will use further information to determine the correct policy path to bring inflation back to 2%.

Oil prices remain a central factor in Gundlach’s analysis. U.S. crude traded above $100 per barrel on Wednesday, a level that adds pressure to inflation figures. Gundlach argued that unless there is a sudden drop in oil prices, the Fed must increase rates in December. "Absent a crack in the oil price, I think they have to hike in December," he said. Warsh reiterated at the press conference that future policy decisions cannot be determined at this time, leaving the December meeting as the next critical decision point.

Gundlach’s personal investment strategy has remained stable despite the recent policy hold. He maintains a portfolio split with 30% in equities, 30% in bonds, 20% in commodities, and 20% in cash reserves. Within his equity allocation, he favors the equal-weight S&P 500 index to limit exposure to potential issues in the artificial intelligence sector. This approach reflects his desire to diversify away from concentrated tech bets while maintaining exposure to the broader market.

The Fed also announced a structural change to its meeting calendar for the coming years. One of the eight scheduled gatherings in 2027 and two in 2028 will focus on policy strategy rather than voting on the fed funds rate. Gundlach said the move did not surprise him, though he believes the current number of meetings is excessive. He advocated for reducing the schedule to six rate-setting meetings, arguing that this would allow for better data evaluation between sessions. "I don’t think eight meetings is really necessary," he said.

The central bank’s decision to hold rates steady follows a period of rapid economic data releases. Warsh’s characterization of the macroeconomic environment as strong contrasts with the market’s expectation for tighter monetary policy. The divergence between the Fed’s current stance and the bond market’s pricing suggests a period of heightened volatility may lie ahead. Gundlach’s comments reflect a growing chorus of investors who believe the Fed’s reaction function has been too slow to account for persistent inflationary pressures.