On inflation and Fed policy, Jeffrey Gundlach disagreed with comments made by Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell. But Gundlach’s views were in line with the consensus on those key issues – inflation will not spike dramatically higher and the Fed will continue with its planned rate hikes.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on March 13. Slides from that presentation are available here. The focus of his presentation was the DoubleLine Total Return Bond Fund (DBLTX).

Mnuchin said rising wages aren’t necessarily inflationary. “Of course they are,” Gundlach said, which prompted him to title his presentation “Inflation is Inflationary.” But he also said he doesn’t see any strong inflationary threats, with one exception.

“Wage increases – coupled with tariffs – would be inflationary,” Gundlach said.

Gundlach also cited a comment by Powell that if inflation rises above 2% to 2.5%, it would make it easier to cut rates.

“That makes no sense,” Gundlach said. Gundlach hypothesized that what Powell meant to say was that increased inflation would give the Fed the flexibility to raise rates, so it could lower them later.

Let’s look at Gundlach’s comments about the economy and the markets.

The key driver of capital allocation

The primary driver of Gundlach’s capital-allocation decisions is the outlook for recession. He said that he and his team look at a dozen or so indicators that predict the likelihood of a recession over the next year or so. None of them are signaling a downturn.

The leading economic indicators (LEIs) are now at six and rising, he said. But they have decreased every time prior to a recession.

“There is no sign of a recession in the next 12 months,” he said, adding that it is almost impossible for the LEIs to turn negative in the next several months, given how slowly they move.

Similarly, the purchasing manager indices (PMIs) tend to go below 50 prior to a recession, he said, but they are rising.