Does Fed Balance Sheet Matter

Bull case: the Fed's balance sheet stopped mattering in 2015 when it stopped QE. Since Trump's election and start of normalized monetary policy, we're back to normal. The Fed's balance sheet doesn't matter in normal times, the Fed could reduce the balance sheet back to the pre-crisis $800 billion level with no effect on economy or markets.

Bear case: the Fed's balance sheet caused three rallies in 2009, 2011, and 2012 with the launch of QE1, QE2 and QE3. Every end of QE (March 2010, June 2011, October 2014) resulted in a stock market correction. The only period that did not was the rally from the election of Donald Trump in November 2016 until the most recent peak in January 2018. The Fed's balance sheet did not rise over this period. However, the Federal Reserve bumped its asset sales up up $20 billion a month from Jan-Mar and since then the market has tracked changes in the balance sheet again. The run-up in stocks was a result of the Fed "doing nothing." Now that it is reducing the balance sheet, the impact on stocks will be negative.

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