Gundlach: U.S. Will Face Recession by Mid-2023

“Expect a recession by the middle of next year,” Jeffrey Gundlach warned investors. The Fed’s monetary tightening will not be as aggressive as expected, he said, but high rates will dampen housing, consumer spending and other sectors, and will force the economy to contract.

Gundlach spoke to investors via a webcast, which he titled “Up, Up and Away,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.

The title was a reprise of the summer of 2020 when fiscal policies that made payments to consumers led to a bubble economy, he said, which was running on “easy money.”

Now the Fed funds rate has risen to nearly 4%. The Fed wants to raise rates and stop inflation, he said.

In 2020, Fed Chair Jay Powell embarked on the fourth round of quantitative easing (QE4), the most ambitious of the Fed’s liquidity programs. It ended in April 2022, after injecting nearly $5 billion of liquidity into the U.S. capital markets.

The S&P 500 has followed the shape of the Fed’s balance sheet, driving equity prices higher until late last year. But both have contracted this year, Gundlach said, and Fed policy is a headwind to stock prices.

The market expects the Fed to raise its funds rate 50 basis points next week, to peak at 5% in May 2023, and stay there for just one meeting. It then expects the funds rate to revert to its current level over the remainder of 2023.