May 6, 2020 - Economy

The Fed now has the world's largest balance sheet

Reproduced from BofA Global Research; Note: Banks included are US Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Bank of China and Reserve Bank of Australia; Chart: Axios Visuals
Reproduced from BofA Global Research; Note: Banks included are US Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Bank of China and Reserve Bank of Australia; Chart: Axios Visuals

By the end of this year, analysts at Bank of America Global Research estimate the Fed's balance sheet will have risen to nearly $10 trillion and the world's six largest central banks will have taken their holdings from around $15 trillion to $25 trillion worth of assets.

The big picture: The Fed now has the largest balance sheet of all central banks, having surpassed the European Central Bank and Bank of Japan.

  • The U.S. central bank's holdings are now equal to 34% of U.S. GDP and are expected to reach 48% by year-end, according to BofA's data.

State of play: To put the size of Fed asset purchases this year into perspective, BofA analysts note that "a few weeks ago it was buying the same quantity per day as it was per month during the [global financial crisis]."

What they're saying: This is "monetary policymaking on steroids," Michael Arone, chief investment strategist for State Street Global Advisors, says in a note to clients.

  • "This evolving, new approach to monetary policy during a crisis may never be walked back."

Why it matters: We could already be seeing the Fed's impact.

  • The stock market, bond market and rising home values may be evidence of distortions and asset price bubbles rather than a reflection of confidence or an expected rebound for the economy.

The bottom line: "The disconnect between an investment’s underlying fundamentals and its price make investors uneasy," Arone says.

  • "As a result of the Fed’s new programs, this tension is now most evident in the credit markets. Sadly, investors may have no choice but to dive in."

Go deeper: The Fed's coronavirus response could have unintended results

Go deeper