Monetary policy at the Federal Reserve has tilted toward the easy side since former central bank chairman Alan Greenspan ran the bank starting in 1987. But Gundlach illustrated just how dramatically that policy had changed since the Great Financial Crisis.
A chart he displayed compared the price trends of the S&P 500, the Bloomberg Commodities Index and the Barclay’s Aggregate Bond Index from 1994 through 2020. Over that period, the S&P rose 17-fold, the Barclay’s bond index climbed about four-fold and the Bloomberg Commodities index doubled.
But what was most striking was that the lion’s share of stocks’ outperformance occurred over the last 12 years at the same time that the Fed embraced very aggressive monetary expansion policies. This prompted Gundlach to question what might happen when the Fed attempts to withdraw excess liquidity from the system.
“The two-year Treasury is going up just as fast as it was in 2017,” he noted. When the Fed funds rate reached 2.5% in 2018, stocks collapsed in the fourth quarter.
This time Gundlach thinks the tipping point could be 1.5% for the Fed funds rate. When the next recession occurs, the “order of magnitude of stimulus” is likely to be even more dramatic than what we’ve witnessed in the last 13 years, he said.