DoubleLine Capital CEO Jeffrey Gundlach said the U.S. Treasury market is sending a clear message to the Federal Reserve that if policymakers are serious about returning inflation to their 2% target, they may have to resume raising interest rates rather than simply maintaining a hawkish stance.

Speaking after the Federal Reserve kept interest rates unchanged, Gundlach said that recent movements in the bond market suggest investors remain unconvinced the central bank will ultimately take the steps necessary to fully tame inflation, even as officials continue to stress their commitment to price stability.

“If you really want to get to 2%, I think you have to raise interest rates,” Gundlach said on CNBC’s Closing Bell on Wednesday.

“I think getting 2% is going to take a long time. We might not get there over the course of the next couple of years.”

The Fed left its benchmark interest rate unchanged at 3.5% to 3.75%, a widely anticipated decision that nevertheless revealed growing divisions within the central bank. Three policymakers dissented in favor of an immediate quarter-percentage-point rate increase, highlighting mounting concern among some officials that inflation remains too persistent to justify holding policy steady.

Gundlach said the Treasury market’s reaction underscored investors’ doubts about whether the Fed will eventually match its rhetoric with action.

While short-term Treasury yields declined, reflecting expectations that policymakers may delay further tightening, longer-dated yields climbed sharply as investors demanded greater compensation for inflation and fiscal risks.

“The two-year Treasury rallied today because it thinks the Fed is taking its time,” Gundlach said.

“And the long bond yield went up significantly after the press conference, because the bond market vigilantes are saying, ‘If you really want us to believe your rhetoric, you’ve got to start acting.'”

Following the Fed’s announcement, the benchmark 10-year Treasury yield climbed more than seven basis points to 4.681%, while the 30-year Treasury yield surged to 5.213%, its highest level since 2007. In contrast, the policy-sensitive two-year yield fell three basis points to 4.244%.

The divergence is significant because shorter-dated Treasury yields largely reflect expectations for Federal Reserve policy over the next few years, while longer-term yields increasingly incorporate investor views on inflation, government borrowing and the long-run credibility of monetary policy.

The steepening of the yield curve after the Fed meeting suggests investors believe inflation and fiscal pressures could remain elevated even if the central bank keeps policy restrictive.

Higher-For-Longer May Not Be Enough

Gundlach’s comments add to a growing debate over whether the Federal Reserve’s “higher-for-longer” strategy will be sufficient to return inflation to target without additional tightening.

Although inflation has moderated considerably from its post-pandemic peak, it has remained above the Fed’s 2% objective for an extended period. That has prompted some economists and market participants to question whether structural forces, including persistent fiscal deficits, labor market tightness, deglobalization and rising energy costs, could make the final stretch of disinflation considerably more difficult.

His view also aligns with concerns increasingly reflected in long-term Treasury yields, where investors appear to be pricing in the possibility that interest rates may need to remain elevated for longer than previously anticipated or even move higher if inflation proves more resilient.

Fed Maintains Hawkish Stance

Federal Reserve Chairman Kevin Warsh sought to reinforce the central bank’s commitment to restoring price stability, emphasizing that policymakers remain prepared to act if economic conditions warrant.

“I understand the desire for rolling forecasts and commentary from this committee, but for our part, we need to observe market reaction to developments direct and unfiltered,” Warsh said.

“I want to stress, of course, that decisions by this committee matter a great deal, and where necessary and appropriate, we will not hesitate to act.”

This suggests the Fed is seeking to preserve maximum flexibility as it evaluates incoming economic data, rather than committing to a predetermined policy path.

Why The Market Reaction Matters

The sharp rise in long-term Treasury yields carries implications well beyond the bond market.

Higher long-term borrowing costs increase financing expenses for mortgages, corporate debt and government borrowing while also weighing on equity valuations, particularly for technology companies whose earnings depend heavily on future growth.

The move also signals that investors remain concerned about the combination of persistent inflation and expanding U.S. fiscal deficits. Rising Treasury issuance to finance government spending has increased the supply of long-dated bonds, adding upward pressure on yields at a time when investors are demanding greater compensation for inflation risk.

Thus, the market’s message for the Federal Reserve is that maintaining restrictive policy may no longer be sufficient to convince investors that inflation will return sustainably to 2%. Unless inflation continues to ease meaningfully, policymakers may eventually face a difficult choice between tolerating above-target inflation or resuming rate increases to boost their credibility.