Like Victor Frankenstein, the Fed may have created its own monster. It’s been called many things, such as Quantitative Easing (QE), QE Lite, QE/Not QE, “Organic” Balance Sheet Growth, and more…
But no matter what you choose to call it, the bottom line is this:
In fact, the balance sheet has grown about $400 billion since August, as reflected in the uptick at the far right of this chart:
Along with the Fed’s decision to increase its balance sheet is a rise in risky asset prices. According to a piece at Newsmax, this is raising eyebrows:
Prices for stocks and other risky assets are also rising at a fast clip – a state of affairs that a growing chorus of investors, economists and former Fed officials say is no coincidence, and potentially a problem.
This pattern of rising prices in risky assets is similar to what happened when the Fed initiated the first three rounds of QE.
The potential problem behind a pattern like this is the “monster” that the Fed is creating. Addressing the problem means answering a critical question…
When and how does the spigot of Fed cash flow get turned off?
Peter Boockvar, chief investment officer with Bleakley Advisory Group, thinks we will have to wait and see what happens:
The risk is what happens when the Fed stops increasing their balance sheet… What will stocks do when that liquidity spigot stops? We’ll have to see.
Of course, if we “wait and see”, any potential damage to the economy will already have started.
Also keep in mind that Powell didn’t want the Fed’s “monster” to be called another round of QE, instead opting in October 2019 to label it “organic” balance sheet growth.