Us stock and bond market bosses are beginning to warn of deflation after the Fed raises interest rates aggressively.

On Wednesday, Ms. Mu said on social media that the current high inflation in the United States is turning into deflation and that it was a mistake for Powell to follow Volcker's example of aggressively raising interest rates. She believes that the Fed's monetary policy decision is based on two lagging indicators, employment and core inflation.By other measures, there are already signs of deflation.

DoubleLine Capital's chief executive, Jeffrey Gundlach, known as the "new debt king", followed by a unanimous view. In an interview with the media website The Market NZZ on Thursday, he said the Fed was overreacting in the fight against inflation and expected a serious slowdown in the US economy.

In Gundlach's view, one of the biggest risks to the US economy isThe Fed's aggressive rate hikes are doing considerable damage to the economy.

Having failed to accurately implement its interest rate decisions for years, the Fed is keen to retain its last remaining credibility. He points out that in 2018, the Fed was able to completely change direction in just six weeks because inflation was still below 2 per cent. But this time, inflation is even more than 500 basis points higher than all Treasury yields, and the Fed has repeatedly stressed its commitment to fighting inflation, so it cannot make a quick shift in monetary policy.

The market now agrees that the Fed will continue to raise interest rates or even intensify them-possibly by 125 or 150 basis points later, and then start cutting rates next year. But according to Gundlach, this is a "very strange" thing: "if interest rates go up and down, why rise? Why not do nothing?What is the meaning of this? This is unhealthy and very bad.”

Even from the perspective of fighting inflation, Gundlach points out that the Fed's target inflation rate will fall from 9% to 2% by the end of next year, but if this is possibleInflation is falling so fast that it doesn't necessarily end up at 2% and could slide into negative territory, and these economic slowdowns could lead to excessive deflation.

"delayed response" of deflation

Gundlach thinksThe next shock is that the Fed will have to overreact to inflation, which was caused by their initial over-stimulus. This will lead to more deflationary momentum than expected.

In his view, the policy launched by the Federal Reserve is lagging behind, and there will be a "delayed response" to deflation, just like the current high inflation.This will greatly increase the volatility of the economy. In this highly volatile situation, the Fed's $1 trillion quantitative tightening program over the next 12 months will exacerbate economic weakness.

Specifically, the number of consumers of upstream brands is decreasing, while low-end retailers like Walmart Inc are springing up a large number of new customers and more and more people using credit cards. "in other words, consumers are borrowing money to buy food." on the other hand, the labor market is in a mess.

But Gundlach said that even so, Federal Reserve Chairman Powell will not stop, he must stick to the fight against inflation. Powell has made a promise and he must keep it unless there is strong evidence that it is no longer necessary. If Powell changes his language, he will go down in history as a laughingstock. In essence, the Fed doesn't care about a mild recession.

The Fed should "slow down".

He also believes that the Fed should slow down the rate of interest rate hikes:

Actually,The Fed should not raise interest rates by 75 basis points at its next meeting. They should only raise interest rates by 25 basis points.Let the time go by slowly.

As long as interest rates are raised gradually, Powell can continue to play the role of inflation fighter. I think we should raise interest rates by 25 basis points at the FOMC meeting in September and then suspend them at the next meeting in November.

We should listen to the bond market, which is right whenever the bond market is at odds with the consensus of economists. And the bond market shows that yields are peaking.

The reason given by Gundlach is that the Fed injected huge amounts of liquidity into the financial system in the second quarter of 2020, while the negative impact did not show up for more than a year, and inflation did not begin to rise significantly until the second half of last year.

Fed officials are also aware of the risks of deflation. On Wednesday, local time, Fed Vice Chairman Brainard said the interest rate decision depends on the data.And be wary of excessive monetary tightening, believing that the lag of monetary policy is uncertain, so there is a risk of excessive tightening:

At some point in the tightening cycle, the risk will be two-sided. The rapid and global nature of the monetary tightening cycle and the uncertainty about the pace of tightening in terms of the impact of tightening in the financial environment through aggregate demand create the risk of excessive tightening.It is important to avoid the risk of withdrawal too soon.