The Fed’s Balance Sheet Picks Up Pace

The expansion of the Fed’s balance sheet is picking up pace. 

Although it has been four months since the launch of QE3 back in mid-September, the increase in the Fed’s balance had been relatively sluggish.  For example, the Fed’s balance sheet had actually contracted over the first seven weeks of the program through the end of October.  And it had only expanded by $36 billion over the first three months of the program even though the Fed had stated its commitment to purchase mortgage-backed securities (MBS) at a rate of $40 billion per month.


Despite the sluggish start to QE3, asset purchases are now accelerating at an increasing rate.  Over the last five weeks, the Fed’s balance sheet has increased by another $69 billion.  And the expansion over the next several weeks is likely to pick up even further for two reasons.

First, the Fed’s MBS purchase program is continuing to pick up steam.  The reason QE3 was slow to get going over the first few months is that it can take up to several months for MBS purchases to settle.  But with each passing month, more and more of these purchases are reaching settlement and the cash is changing hands from the Fed to the banks.

Second, the Fed’s outright Treasury purchase program announced in mid-December as a supplement to its existing MBS purchase program got underway on January 3.  So going forward, markets will receive a daily injection of liquidity from Treasury purchases to go along with the massive bursts that occur two to three times a month from the MBS purchases.

Why is this important?  Because investment markets including stocks, high yield bonds, industrial commodities and precious metals have all shown the propensity to drift higher behind the fuel of liquidity injections from the Federal Reserve.  And Treasury purchases have proven to be particularly supportive to risk assets due to the daily liquidity flows.

So despite the fact that global economic growth remains sluggish and the upcoming earnings season promises to be lackluster at best, it would not be surprising to see stocks and other risk assets push to new post crisis highs for no other reason than an increasing sugar high thanks to the U.S. Federal Reserve.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.


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