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.

Microsoft sought to reassure employees and investors that its multibillion-dollar artificial intelligence strategy is beginning to deliver tangible returns, with Chief Financial Officer Amy Hood citing accelerating Azure cloud growth, surging adoption of Microsoft 365 Copilot, and record customer commitments as evidence that the company’s unprecedented AI spending is gaining traction.

The message came after Microsoft reported quarterly results that exceeded Wall Street expectations, helping send its shares about 2% higher in after-hours trading as investors looked beyond heavy capital spending to signs that demand for AI services is accelerating.

Microsoft posted revenue of $90 billion, comfortably ahead of analysts’ estimates, while continuing one of the largest infrastructure buildouts in corporate history to meet soaring demand for AI computing.

In a memo to employees following the earnings release, Hood acknowledged that Microsoft is entering a new fiscal year with significant opportunities but stressed that maintaining leadership in artificial intelligence will require the company to keep evolving and investing aggressively.

“We begin this new year with clear priorities, strong customer demand, and significant opportunity ahead,” Hood wrote.

“At the same time, capturing the opportunity in front of us will require us to continue evolving, raising our ambition, and finding new ways to deliver for our customers.”

Azure and Copilot Emerge As AI Growth Engines

Hood highlighted Azure and Microsoft 365 Copilot as two businesses demonstrating that Microsoft’s enormous AI investments are beginning to generate measurable commercial returns. Azure and other cloud services revenue accelerated 43% during the quarter, reflecting robust enterprise demand for AI infrastructure, cloud migration and generative AI workloads.

Microsoft also disclosed that Azure generated more than $100 billion in revenue during fiscal 2026, representing 41% annual growth and underscoring the platform’s transformation into one of the company’s largest businesses.

The performance is significant because Azure has become the foundation for Microsoft’s AI strategy, hosting not only its own services but also workloads from OpenAI and thousands of enterprise customers deploying generative AI applications.

Copilot also showed strong momentum.

Microsoft said paid commercial Copilot seats more than doubled sequentially to surpass 30 million, suggesting businesses are increasingly willing to pay for AI-powered productivity tools integrated into Microsoft 365.

The rapid growth addresses one of investors’ biggest questions over the past year: whether enterprises would move beyond AI experimentation and begin deploying generative AI at scale across their workforces.

Massive AI Spending Continues

While Microsoft’s earnings reinforced confidence in its AI strategy, they also highlighted the enormous financial commitment required to remain competitive against rivals including OpenAI, Alphabet, Amazon and Meta Platforms. The company invested more than $41 billion in capital expenditures during the quarter, primarily to expand global data center capacity and AI infrastructure.

Hood praised Microsoft’s infrastructure and engineering teams for rapidly bringing new computing capacity online while improving efficiency.

“We invested over $41 billion in capex to support the demand we continue to see,” she said.

“A big thank you to our infrastructure teams for bringing new capacity online and to our engineering teams for creating efficiencies that enable us to do more with every gigawatt we deploy.”

Major technology companies are collectively expected to spend hundreds of billions of dollars annually on AI infrastructure over the coming years as competition intensifies. Against that backdrop, investors have increasingly scrutinized whether such unprecedented spending will eventually translate into sustainable earnings growth and attractive returns on invested capital.

Beyond headline revenue growth, Microsoft’s results pointed to continued strength in long-term enterprise demand. Commercial bookings, excluding OpenAI, increased 18%, driven by Microsoft’s core subscription business.

Even more notable was the company’s commercial remaining performance obligation, a measure of contracted future revenue, which climbed to $678 billion after increasing by more than $50 billion from the previous quarter. The expanding backlog provides Microsoft with substantial revenue visibility and suggests customers continue committing to long-term cloud and AI contracts despite economic uncertainty.

Microsoft Cloud revenue reached $59.3 billion during the quarter and totaled $214 billion for the full fiscal year, representing 27% growth in both periods.

While artificial intelligence dominated Microsoft’s earnings narrative, Hood emphasized that security, reliability and product quality remain fundamental priorities.

“Thank you for staying focused on security, quality, and reliability,” she told employees.

“The trust customers place in us to power their most important workloads is earned every day through the work you do.”

The emphasis comes as Microsoft continues strengthening its cybersecurity posture following heightened regulatory scrutiny and increasingly sophisticated cyber threats targeting cloud providers.

Mixed Performance Across Other Businesses

Not every segment delivered strong growth. Windows OEM and Devices revenue declined 7% as PC manufacturers continued adjusting inventories amid higher component costs.

Xbox content and services revenue also fell 10%, largely because the comparable period benefited from stronger first-party game releases. However, Microsoft said Forza Horizon 6 attracted six million players within its first two days, making it one of the strongest launches in the franchise’s history.

Elsewhere, Microsoft 365 Consumer cloud revenue increased 24%, subscriber numbers rose 7%, LinkedIn revenue climbed 12% on stronger marketing demand, while search advertising revenue excluding traffic acquisition costs grew 10% as Bing and Edge continued gaining market share.

However, Hood’s memo was notable not only for highlighting Microsoft’s financial performance but also for reinforcing management’s broader message that fiscal 2026 marked a transition from building AI infrastructure to increasingly monetizing it.

She credited employees for expanding computing capacity, improving product quality, refining business models and adopting new operating structures that helped deliver what she described as Microsoft’s strongest execution of the year.

“The results we delivered in FY26 and the momentum we carry into FY27 are a direct reflection of your efforts,” Hood wrote.