Knowing the Impact of the Fed’s Balance Sheet

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By Maurice Stouse, Branch Manager and Financial Advisor

Should savers, investors and spenders pay much, if any attention to the Federal Reserve’s balance sheet?

The Fed’s balance sheet is just like any other; it is a statement of assets and liabilities. It is produced every Thursday afternoon. An interested person can go online and navigate to federalreserve.gov to see the latest statement. It is published to give the public the opportunity to know what the Federal Reserve is doing as this can have significant impact on savings, investing and spending.

These impacts are on savings rates, interest rates, asset values, potential inflation and the overall growth of the economy. A saver would want to know what trends are emerging and what perhaps to expect for their savings whether its in checking accounts, savings accounts, money market accounts (and money market mutual funds) or CDs.

An investor might want to know how much money is in the system and chasing assets be those stocks, bonds, real estate or even commodities. The greater the money supply – which the balance sheet shows every week, the greater the amount of dollars chasing goods, services and assets.

A spender, and everyone is a spender of some sort, might want to know the impact an increasing money supply might have on the cost of goods and services. Once again, the greater the money supply, the greater amount of money available to purchase goods and services. That could make things more costly.

The balance sheet is a window into what the Federal Reserve is doing with regards to the amount of money that is in the system. The Fed can print money and then get it into the system by way of purchasing government bonds and other similar assets. This will increase the assets on the balance sheet and in turn it injects money into the system. The money that the Fed prints or issues are liabilities. As the money supply grows that should have a calming if not reducing effect on interest rates. Corresponding to that it may also increase the appetite for risk assets such as stocks or real estate because more money is available to invest. This is one way that asset prices appreciate.

To think of it more simply, imagine a selection at a table of goods which represent assets (in this case, stocks or bonds or real estate). The individuals in the room are here to look at and perhaps buy these assets. Also imagine the individuals as the money supply. The more of them there are, the more potential buyers. More buyers with the same amount of goods would probably push the price of those up. Now, if you reduce the number of buyers (reduce the money supply) and the amount of goods remains the same, there is less demand and perhaps falling prices. This is one way to explain the impact the money supply can have on asset prices.

The Great Recession saw the Federal Reserve significantly increase its balance sheet where in early September of 2008 it stood at 905 billion dollars. It began moving up quickly as the Fed was trying to increase the money supply and release the tension on credit. It remained high, peaking at approx. 4.5 trillion in December of 2014. On January 20th of this year, it stood at 4.15 trillion. If you watch the move every week you would have seen it moved down $29 billion from the previous week. Some Market prognosticators watch this weekly or observe the trend to get an idea on the impact it might have on the markets (your stocks, bonds and real estate).

Having a plan for your saving, for your investing and for your spending can be a significant step in getting to your goals in life. Visit with an advisor or expand your own research to see how understanding the money supply can impact your plans and goals.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management and Raymond James and he resides in Grayton Beach. He has been in financial services for over 32 years. His main office is located at The First, First Florida Bank, 2000 98 Palms Blvd, Destin, FL 32451. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City, Pensacola and Tallahassee. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.

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Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.