The Federal Reserve should back away from another interest rate increase in light of the collapse of Silicon Valley Bank (SVB), according to DoubleLine Capital CEO Jeffrey Gundlach.
Speculation of a 0.5 percent rate swirled last week after Fed Chair Jerome Powell told the Senate Banking Committee that rates were “likely to be higher than previously anticipated” due to a “stronger than expected” economy and continued high inflation.
In a CNBC appearance on Monday, Gundlach said that he expected a rate increase of 0.25 percent would be announced at the central bank’s meeting next week despite concerns of an impending banking crisis. He said that he expected rate hikes to be paused after that.
“At this point, the Fed is not going to go 50,” Gundlach said during an interview on Closing Bell. “I just think to save … their credibility, they’ll probably raise rates 25 basis points. I would think that that would be the last increase.”
“I wouldn’t do it myself,” he added. “But what do you do in the context of all this messaging that has happened over the past six months, and then something happens that you think you’ve solved.”
A Federal Reserve police officer on Monday is pictured on the left guarding a building entrance in Washington, D.C., while DoubleLine Capital CEO Jeffrey Gundlach is shown on the right during an event in Beverly Hills, California, on October 3, 2017. Gundlach on Monday said the Federal Reserve should not raise interest rates next week, although he expected it would. Alex Wong; Matt Winkelmeyer
The Fed raised rates by 0.25 percent in February, down from a 0.5 percent increase in December. Prior to that, there were four consecutive rate increases of 0.75 percent— likely a key factor in the SVB collapse, as the bank had invested in mortgage-backed securities.
A minority of experts expect the rate hikes to be paused next week. Goldman Sachs analysts said on Sunday that they did not expect Powell to follow through with the increase in light of the uncertainty, according to Reuters.
However, many others, including analysts from Citigroup and Bank of America, expect the Fed to continue the program to combat inflation with another modest interest increase.
The SVB collapse sparked panic, inspiring a widespread run on banks that led stock prices for a significant number of them to plummet on Monday, and triggering multiple regulatory pauses in trading.
New York-based Signature Bank was also shut down by authorities on Sunday. The administration of President Joe Biden announced that all SVB and Signature Bank depositors would get their money back, regardless of whether amounts exceeded the $250,000 guaranteed by the Federal Deposit Insurance Corporation (FDIC).
Rather than coming from taxpayers, the money returned to depositors will come from the FDIC’s Deposit Insurance Fund, into which banks pay.
Those who invested in or loaned money to the failed banks are not expected to receive any federal assistance, which would likely require Congress approving a taxpayer-funded bailout.
The Fed on Monday said that it would be investigating the SVB collapse, with Powell saying in a statement that the circumstances of the collapse demanded “a thorough, transparent, and swift review by the Federal Reserve.”
Newsweek has reached out to the Fed for comment.