DoubleLine CEO Jeffrey Gundlach said the Federal Reserve might need to embark on quantitative easing to increase the money supply.
"One thing that might have to happen here is the Fed might have to start 'QE lite' as I call it, meaning they go back to expanding their balance sheet in line with the increase in currency to get the free reserves in the system higher," Gundlach said Wednedsay on CNBC's "Halftime Report."
Gundlach highlighted the "kerfuffle" in short-term money markets earlier this week and the "amazing" move in the fed funds target rate, which led the central bank to conduct repurchase operations for the first time in a decade.
"Clearly short-term rates getting out of the Fed's control even shortly is problematic," the so-called bond king said. "The problem is there's not enough reserves in the system to provide liquidity. ... It just seems to me the Fed is almost anxious to increase start increasing its balance sheet again."
In a rare move, the effective federal funds rate on Tuesday rose above the upper bound of the central bank's targeted overnight range. The effective rate rose to 2.3%, above the 2.25% target.
Gundlach predicted in a webcast on Tuesday that interest rates have bottomed for this year after dipping to their historic lows in August on fears of a global economic slowdown. He said QE will drive long-term borrowing cost higher.
"Historically, quantitative easing has actually been correlated with the rising in long-term interest rates," he said, adding the drastic decline in rates last month was due to "panic buying."
The Fed will announce its decision on interest rates on Wednesday. Gundlach said he expects the central bank to cut rates by a quarter point.
Gundlach, a respected markets forecaster, oversees $140 billion of assets under management at DoubleLine, according to its website.