Jeffrey Gundlach says the Fed is no longer behind the curve and Powell has restored his credibility

Published Wed, Jul 27 20225:19 PM EDTUpdated Wed, Jul 27 20225:38 PM EDT

DoubleLine Capital CEO Jeffrey Gundlach said Thursday that the Federal Reserve is raising interest rates at a pace fast enough to restrain soaring inflation. "The Fed is no longer behind the curve," Gundlach said on CNBC's " Closing Bell Overtime " Thursday. "That's why the markets significantly calmed down ... I think a local high, if not an all-time high in Jay Powell's credibility." The so-called bond king's comments came after the central bank enacted its second consecutive 0.75 percentage point interest rate increase on Wednesday. Powell left the door open about the size of the Fed's next rate move in September and noted it would eventually slow the magnitude of rate hikes. The stock market rallied following the Fed's decision and Powell's remarks, with the S & P 500 jumping 2.6% and the Nasdaq Composite climbing more than 4%. "This market reaction seems less of a sugar high than the prior two in June and May," Gundlach said. Gundlach appraised Powell's performance at the news conference, saying it was one of his best to date. "He started out with a stick — basically it's essentially bringing inflation down," Gundlach said. "And then he starts to get more dovish as he goes along. And he starts to say things that are reassuring to the markets and talking the markets up and frankly changing the sentiment." Powell noted that he doesn't believe the economy is currently in a recession. While another large hike may be necessary, he added that there will come a point when the Fed needs to slow the pace of increases. "A crash landing is avoided," Gundlach said. "The best possible outcome for all financial markets would actually be a mild recession and continuous sequential decline in the CPI." Powell acknowledged that bringing down inflation could come with a cost to general economic growth and the labor market in particular. "We think it is necessary to have growth slow down. Growth is going to be slowing down this year for a couple of reasons," Powell said, as inflation slows consumer purchases and dents business activity. The economy, he added, probably will grow below its long-run trend for a period of time. "We actually think we need a period of growth below potential in order to create some slack."