The Fed’s balance sheet hits an all-time high as Quantitative Tightening fails to take effect

While investors evaluated economic risks from the Federal Reserve (Fed) monetary policy the markets continued to trade in a choppy manner on Friday, March 25th.

The S&P 500 held on to modest gains at 0.17% in green so far while the tech-heavy Nasdaq 100 didn’t change much swinging between small loses and gains.

Investors continue to wrestle with the ramifications that the current geopolitical tensions have on the markets coupled with a rise in raw-material costs and commodities shooting up since the beginning of 2022.

Super tight Fed balance sheet
Key parts of the U.S. Treasury yield curve continue to flow towards inversion while the Fed steps in to hike interest rates. These drastic steps and indicators are sparking debates about whether an economic slowdown is afoot or even worse a recession.

Welt residential market expert Holger Zschaepitz has hit Twitter to share his view on the recent Fed buybacks stating:
“Quantitative Tightening? Not yet! Fed balance sheet just hit a fresh ATH at $8,962.5bn as US CenBank has bought more Mortgage-backed securities and US Treasuries in the past week. Total assets now equal to 37.3% of US’ GDP vs ECB’s 82.3% and BoJ’s 136.4%.”

What happens to the markets now?
The Fed hasn’t yet made a final decision on shrinking its balance sheet and as experts pitch in we can see that it’s actually increasing. After the 2008 financial crisis, a period of 2 years was given to the markets before the Fed decided to stop purchasing bonds.

Treasury markets seem to be more vulnerable than they have been in the past and if its largest buyer (the Fed) abruptly pulls back there will be pain in the markets. During the Covid crisis, new tools have been put in place such as the repo facility which will serve as a backstop for the markets.

Investors will be well advised to keep an eye on the Fed balance sheet as well as rising rates globally to better understand in which direction their favorite stocks will move. For long-term investors which are invested in stocks with strong balance sheets, this is just another blip on the radar.