10 months ago • 1 min
For a simple explanation of why we saw one of the biggest stock market bull runs on record between 2009 and 2022, look no further than this chart. It shows the total amount of assets the Federal Reserve (the Fed) had on its books since the start of the 2008-09 global financial crisis.
The chart shows how the Fed expanded its balance sheet, buying up massive amounts of Treasury bonds in the open market, driving up the prices of those bonds and driving down their yields. What’s more, the cash the Fed creates to buy those bonds increases the money supply. The whole process, which is formally called “quantitative easing” but is colloquially referred to in the market as “printing money,” makes it a lot cheaper to borrow money – so businesses can take out super-affordable loans to grow their operations, and consumers can get ultra-low rates on mortgages and other forms of debt. It’s an excellent environment for investments like stocks, crypto, and real estate.
Since April 2022 (blue arrow), however, the Fed’s been tightening, instead of easing. In other words, it’s stopped using bond interest payments to buy more Treasuries, and instead is letting bonds mature without reinvesting them. They’re letting the bonds “roll off” the balance sheet.
Back in September 2008 when investment bank Lehman Brothers collapsed (green arrow), the Fed’s balance sheet stood at just $1 trillion. But even after dropping off since April 2022, it’s still over eight times that size today – and it's hard to see it going back to that $1 trillion mark any time soon.
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