Fed’s Powell made mistake by tightening on ‘autopilot’

Federal Reserve Chairman Jerome Powell made two mistakes during his news conference Wednesday, according to bond king Jeffrey Gundlach.

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The Fed raised interest rates by a quarter point Wednesday, as expected, and lowered its forecast to two hikes from three for next year.

However, during the post-meeting news conference, Powell said the central bank was satisfied with its program to reduce the balance sheet and has no plans to change it.

Jeffrey Sherman, DoubleLine’s deputy chief investment officer, called the notion of autopilot “scary.” He told CNBC once it appeared that was happening, the market got spooked.

“This is not a tested program of quantitative tightening,” he said on “Closing Bell.” “I don’t think it is like an airplane that can really fly on autopilot and we can all feel comfortable. It feels like Tesla out there trying to really sample the autopilot behavior. “

Stocks plunged Wednesday, with the Dow Jones Industrial Average dropping 351.98 points. It erased a 380-point gain that came before the Fed decision, closing at its lowest level so far this year at 23,323.66.

Investors flocked to bonds, sending the yield on the 30-year Treasury to below 3 percent. The 10-year Treasury dropped to 2.757 percent. Bond yields move inversely to prices.

Sherman said the market doesn’t trust the idea that the central bank can “tweak through interest rate hikes.”

That said, he’s not making any investment changes because the firm doesn’t manage day to day. Instead, there will be a reassessment at the end of the year.

What will be key is the U.S. deficit, coupled with the Fed’s quantitative tightening, Sherman noted.

“It just looks still ugly for the bond market,” he said. “The bond market is just saying the Fed is probably losing control here. Powell needs to be the pragmatist. Come back and actually talk like someone who actually been a practitioner in the market.”

The Fed did not immediately respond to a request for comment.

— CNBC’s Jeff Cox and Thomas Franck contributed to this report.


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