Jeffrey Gundlach, a bond expert, shared his views on CNBC about future economic changes. He believes the Federal Reserve might cut interest rates twice this year and noted a drop in employment.

Fed Chair Comments and Rate Expectations

Gundlach described Fed Chair Powell’s recent comments as somewhat aggressive during last week’s press conference. He thinks Powell should stay in his role but suggested that stepping down could speed up a rate cut. He also remarked that the two-year treasury rate indicates a likely reduction in rates. However, he raised concerns about the increasing unpredictability of upcoming economic data. Our main view is that the Federal Reserve will reduce interest rates twice before the end of 2025. Softening employment data allows the Fed to ease its policies. For example, the latest jobs report revealed only 110,000 new jobs in July, with the unemployment rate climbing to 4.2%. The bond market appears to be gearing up for these rate cuts. The current two-year Treasury yield is at 4.45%, significantly lower than the Fed’s target. This suggests that the market expects lower rates ahead, similar to how the yield curve inversion indicated the policy shift we saw in 2023 and 2024. Traders should think about buying interest rate futures, particularly those linked to SOFR, to benefit from potential rate drops. These investments will increase in value as the market adjusts to the anticipated cuts. It’s wise to invest in contracts that expire after the September and December Fed meetings. We should also remain cautious about initial economic reports, as they often get revised downward. The job reports for May and June this year were adjusted lower in subsequent months, revealing that the economy may be weaker than initially thought. This unreliability suggests we should be skeptical of any surprising strength in early data releases.

Investment Approaches and Market Outlook

This perspective is generally favorable for stocks. Buying call options on the S&P 500 set to expire in October or December 2025 could be a smart move. This strategy directly benefits from the expectation that lower borrowing costs will enhance corporate profits and boost investor confidence. There’s a slight chance that the Fed chair could resign, which might lead to a rapid rate cut. Although this scenario is unlikely, it could cause short-term market volatility. A cost-effective way to protect against this risk is by owning some out-of-the-money call options on the VIX. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now