The Federal Reserve's cautious stance on raising interest rates could backfire by creating uncertainty in the economy and hurt the U.S. central bank's credibility, Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Thursday.

"This U-Turn - on nothing fundamentally changing - is unprecedented," Gundlach said in a telephone interview. "Three months ago, we were on 'autopilot' with the balance sheet - and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning."

The Fed on Wednesday scaled back its projected interest-rate increases this year to zero from two in its December forecasts, and said it would end the drawdown of its bond holdings in September after holding rates steady.

Gundlach, who oversees more than $123 billion in assets and is known on Wall Street as the "Bond King," said he feels the Fed's massive shift in such a short period on quantitative tightening could hurt the U.S. central bank's credibility.

"They aren't telling you what they are targeting. It's like they aren't really telling you what their motivation is," Gundlach said. "Just because things seem invincible doesn't mean they are invincible. There is kryptonite everywhere. Yesterday's move created more uncertainty."

Gundlach, who correctly predicted the S&P 500 would post negative returns in 2018, said the benchmark index is set for another negative year. He said the stock market, for now, "likes the fact that they (the Fed) aren't going to give them any problems."

But things could change quickly and dramatically, he said. "It feels eerily like '07," he said. "The stock market is near its high and the economy is noticeably weaker - and yet everyone is saying 'Everything is Great!'"

Against this backdrop, Gundlach said he favors a plain-vanilla Treasury fund investing in maturities of one to five years.