By Tim Courtney, Chief Investment Officer
Since the shutdowns of last year, both the government and Federal Reserve have been extremely active in getting cash and liquidity into markets. From February 2020 until now, the Fed’s balance sheet has grown from just over $4 trillion to about $8.3 trillion. In comparison, the balance sheet grew from about $1 trillion to $2 trillion during the mortgage crisis in late 2008 through early 2009.1
The Fed had earlier noted that it planned to start tapering its $120 billion monthly bond purchases in 2022 but did not expect to raise rates until 2023.2 On Friday, this timeline was generally confirmed and not delayed or changed by the current spike in coronavirus cases. As inflation has moved higher, the Fed has indicated that the $120 billion in monthly bond purchases would start winding down.3
There has been much debate on the degree to which all this liquidity has affected market prices. While consumer price inflation has risen, the Fed is adamant the increases will soon moderate. Asset prices have also mushroomed.
As part of its bond purchasing activity, the Fed has been very active in the mortgage arena. Between March 5, 2020, and June 28, 2021, it bought $982 billion in mortgage bonds.4 This activity has kept mortgage rates down, causing huge demand and price increases. In June 2021, the average U.S. home price increased 17% year-over-year, the highest annual rise since 1979.5 Additionally, low borrowing rates have caused a huge increase in demand for cars at the same time a shortage of semiconductors needed for automobile manufacturing has constrained supply.
The Fed has also been buying a significant number of Treasury Inflation-Protected Securities, buying a large amount of issuance and owning a quarter of the market as of May 2021 ― a substantial increase from the 10% it owned in 2019.6 Treasury Inflation-Protected Securities prices have almost certainly been affected by these ongoing purchases.
These actions have created an abundance of market price moves, including those within stock markets. Because of this, we are hoping to see a semblance of a return to normalcy sooner rather than later. While it is likely that GDP growth will begin to moderate in coming quarters, the liquidity in markets appears more than sufficient to help the recovery continue well into 2022.
If you have questions, please contact your Exencial advisor.
- FederalReserve.gov (8/23/21) – Credit and liquidity programs and the balance sheet, recent balance sheet trends
2. CNBC.com (3/17/21) ― Fed sees stronger economy and higher inflation, but no rate hikes
3. CNBC.com (8/27/21) ― Powell sees taper by the end of the year, but says there’s ‘much ground to cover’ before rate hikes
4. The Wall Street Journal (6/28/21) ― Fed officials debate scaling back mortgage-bond purchases at faster clip
5. CoreLogic (8/3/21) ― U.S. home price insights
6. Bloomberg Professional Services (5/24/21) ― TIPS may be skewed by Fed, but inflation reading undeniably high
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.