Having a budget is so important, even the world’s largest central banks have one. Over the last 18 months though, that budget has come out to about $834 million dollars an hour, according to Bank of America strategists. Central banks didn’t get a raise, they just had access to the money printing machine.
That's an oversimplification at its finest, but the case in point remains the same: It’s expensive to prop up an economy through monetary policy and controversial too. So can the Fed actually win?
The trickle-down effect, kind of
We’re not talking about trickle-down economics or Ronald Reagan here. We’re talking about market-wide implications that have sent graphs jumping across the board with both public and private money.
The Federal Reserve has upped its asset-buying exponentially since the onset of the pandemic to help maintain its economic agenda. $120 million dollars a month split two-thirds bonds and one-third MBS doesn’t go unnoticed, and the Fed’s balance sheet is feeling it.
But it’s not just government money
Classic quantitative easing—the Feds expanding its own balance sheet (by buying bonds and injecting money into the economy), flooding the economy with cash and keeping interest rates low—has propped up equity markets (i.e., S&P 500) quite nicely since early 2020.
The total market capitalization of the entire public US stock market rose over 20% or $7 trillion USD in 2020 alone. The P/E ratio of the S&P 500 increased from the pre-pandemic high of 25 to over 35 now.
The Buffet Indicator is also broken, presently sitting at 243% of the annualized GDP and sitting in the deep red, where it’s been for a while now. These exponential climbs seen in both the markets and government spending are positively correlated, although probably not benefiting everyone equally.
With perpetual speculation and conjecture, it’s natural to wonder what the outcome of all this quantitative easing will eventually be.
To the extent that the surrounding economy uses the money productively, and grows accordingly, that may not be a bad thing. But excess cash, all else equal, will drive up prices. And so far in 2021, we've seen inflation pick up.
However, the Fed has continued to maintain that the inflation we're seeing now is only a temporary bump due to pandemic-stimulus and post-pandemic consumer demand increases. Regardless, analysts and investors alike are understandably worried that high-flying balance sheets and stretched ratios aren't sustainable, with some bracing for a pullback. And yet, how the economy and markets shape up and play out all remains to be seen.