The balance sheet of the Federal Reserve (shown on right axis) has increased very substantially in 2020. After the Fed cut interest rates to zero, there is a very limited amount of actions they can take to further juice the economy. Quantitative Easing is one such action. By expanding its own balance sheet (by buying bonds, and therefore injecting money into the economy), the Fed floods the economy with additional cash, lowering interest rates and propping up equity markets. For additional information on the relationship between interest rates and stock market prices, see our model on interest rates.
The Fed's balance sheet expansion in early 2020 very clearly aligns with the S&P500 crash and subsequent recovery. This suggests that the economy isn't actually doing as well as the S&P500 suggests, and raises serious concern over the sustainability of the current stock market performance. Is additional QE possible?
The below table cites all data and sources used in constructing the charts, or otherwise referred to, on this page.
|S&P500 Price||Yahoo! Finance S&P500 Daily Close Values|
|Federal Reserve Balance Sheet||Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level [WALCL], retrieved from FRED, Federal Reserve Bank of St. Louis;|