HOLLYWOOD, Fla. (Reuters) - The U.S. Federal Reserve could be courting deflation if it hikes interest rates too soon, particularly as the rest of the world struggles with subdued or even negative price pressures, DoubleLine Capital’s Jeffrey Gundlach warned on Tuesday.
“I worry against this global backdrop of deflation, raising the short-term interest rates would have the U.S. dollar appreciate, as it has already started to, and court deflation,” Gundlach, DoubleLine’s chief executive and chief investment officer, said at ETF.com’s Inside ETFs conference in Hollywood, Florida.
“The Fed seems to want to raise interest rates simply because they don’t want to be at zero when the next recession occurs,” he said.
The U.S. dollar has gained steadily against a basket of major currencies in recent months .DXY. A strong currency fights inflation because it makes goods from abroad cheaper.
The Fed is weighing whether to raise interest rates from near zero later this year. But inflation in the world’s largest economy remains well below the central bank’s 2 percent target. [ID:nL1N0U12H4]
In December, for example, U.S. consumer prices recorded their biggest drop in six years and a gauge of underlying inflation was flat.
Mohamed El-Erian, chief economic adviser at Allianz, said in a CNBC interview on Tuesday that he expects the Fed to lift rates about mid-year and then proceed slowly.
Gundlach said he has added to his position in gold in recent weeks as he expects its price to rise.
Oil prices should also gain by year-end, he said, calling the more than 50 percent drop in prices since June a “black swan” event.
“It has dropped enough that there is someone out there that is on the edge of bankruptcy,” he said, such as “some bank, a regional bank, a hedge fund for sure.”
Nevertheless, Gundlach said, oil’s gain would be limited this year.
“Oil is not going to end the year at $90 a barrel,” he said.
Reporting by Jessica Toonkel; writing by Luciana Lopez; Editing by Dan Grebler