A severe recession is on the horizon - and the Fed will axe interest rates to limit the fallout, DoubleLine's chief investor says

• The US economy is barreling toward a serious recession, DoubleLine Capital's Jeffrey Sherman says.
• Sherman predicts an embattled Fed will cut interest rates by a whole percentage point in response.
• DoubleLine CEO Jeffrey Gundlach has also warned of a recession and a flurry of loan defaults.

The US economy will suffer a severe recession, spurring the Federal Reserve to slash interest rates by a whole percentage point at once, DoubleLine Capital's chief investment officer says.

"A multitude of economic indicators we look at are flashing either warning or recessionary signals," Jeffrey Sherman told Bloomberg. "By the time they cut, it will be 100 basis points."

Sherman singled out the inverted yield curve, a reliable predictor of past recessions. Short-dated US Treasuries are currently paying higher yields than long-dated ones, signaling investors expect the Fed to cut rates in the next few years — which the central bank typically does during economic downturns.

"The bond market is telling the Fed that they've overtightened and they will have to cut rates," Sherman said. He predicted that policymakers would be slow to act, and eventually opt to reduce rates by 100 basis points in one go to pull the economy out of the doldrums.

Sherman added that a recession was likely to hit in another 12 to 18 months, and disclosed that he's betting on long-dated government bonds. He's also purchased shorter-maturity, investment-grade corporate bonds as they offer sizeable yields, and he sees little risk of imminent defaults, he said.

However, Sherman noted an increasing percentage of companies are failing to repay their variable-rate loans, due to the Fed hiking borrowing costs from almost zero to over 5% since last spring. If that trend continues, it could indicate a recession is looming, he said.

"I think one signal to watch now is the rising default rate within the loan market," Sherman noted.

DoubleLine's billionaire CEO, Jeffrey Gundlach, has been sounding the recession alarm for several months. The fixed-income guru, whose nickname is the "Bond King," has also predicted pain for stocks, a wave of loan defaults, stubborn inflation, and significant rate cuts by the Fed.