(Kitco News) Economic problems are starting to pile up, and recession will be here in a few months, which could force the Federal Reserve to cut rates "a couple of times" this year, according to DoubleLine Capital CEO Jeffrey Gundlach.
"Economic headwinds are building. The recession is here in a few months," Gundlach told CNBC. "All we really need is the unemployment rate to go higher."
When the Fed is faced with the choice between inflation or the economy, the U.S. central bank will always choose the latter. "When forced to choose, they are going to give up the inflation fight to take care of a growing unemployment problem and a growing economic pivot," Gundlach said.
And cutting rates in this inflationary environment is very problematic as the Fed's monetary policy response will weigh on already high price pressures, he added.
"If we have a recession against this financial system, the Fed will have to act very dramatically. It is always more deficit spending and more quantitative easing," the DoubleLine Capital CEO said. "Almost everybody realizes there's a recession coming. It is just a question of how severe it is going to be."
One red flag to watch in the economy is potential liquidity issues, Gundlach warned.
"If [the Fed] continues on this [rate] path, the gap between what you can get on T-bill and what you can get in the banking system will grow, and that will counterproductively cause shrinkage in liquidity," he said.
Right now, the optimal strategy is to continue to reduce risk on strength, which means selling equities into rallies. "Markets are so volatile that it is almost impossible to sell on weakness," Gundlach explained.
At the beginning of March, Gundlach said that gold at $1,800 an ounce was a buy despite the Fed still pursuing its aggressive tightening cycle.
In the last two weeks, gold kicked off a new rally triggered by the banking crisis, testing the $2,000 an ounce level three times last week. At the time of writing, June Comex gold futures were trading at $1,993.80, up 1.15% on the day and up 7% on the month.
"I've been somewhat favorable on gold. Once it got to $1,800, it went quite a bit higher than that, but it's now come back down to almost $1,800. And gold probably deserves a role in portfolios at $1,800 type dollar price, even though the Fed is raising interest rates," Gundlach said during his latest webinar titled 'Survivor.'
