Bond investor questions Fed's decision to hold rates steady

DoubleLine founder Jeff Gundlach stated on Wednesday that the Federal Reserve lacks a clear reason for pausing rate hikes. He told CNBC's Closing Bell that the central bank is currently behind the curve despite recent positive economic data.

Gundlach pointed to remarks made by Fed Chairman Kevin Warsh during the post-decision news conference, where Warsh described the macroeconomic environment as strong. Gundlach noted that headline consumer price index data is heading toward 4 percent and that the commodity index is rising in a bull market. He said he does not understand why the Fed is reluctant to move given these conditions.

The comments follow the central bank's decision to leave interest rates unchanged at its October meeting. During the September meeting, the Fed increased rates by 25 basis points. Gundlach argued at that time that a 50 basis point increase was necessary rather than a gradual approach across multiple meetings.

Current market data supports Gundlach's view that the Fed needs to act further. The overnight rate sits between 3.75 percent and 4 percent, which is well below the 2-year Treasury note trading at approximately 4.7 percent. This spread suggests the central bank has not raised rates enough to match market expectations.

Traders price an 85 percent probability of a 25 basis point rate hike at the December meeting, according to CME's FedWatch tool. The Fed released a statement saying it will use further information to determine the correct policy to ensure a return to its 2 percent inflation goal. Chairman Warsh reiterated at the press conference that future policy decisions cannot be determined at this time.

Gundlach said he expects a hike in December unless oil prices drop. U.S. oil prices continued to trade above $100 per barrel on Wednesday. He stated that his investment strategy remains unchanged, with 30 percent of his portfolio in equities, 30 percent in bonds, 20 percent in commodities, and 20 percent in cash. He favors the equal-weight S&P 500 to limit exposure to potential artificial intelligence issues.

The Fed also announced that one meeting in 2027 and two in 2028 will focus on policy strategy without a rate vote. Gundlach said this move was not surprising and expressed support for reducing the number of rate-setting meetings from eight to six. He argued that fewer meetings allow for a couple months of data to filter in before decisions are made.