Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ News / World/  Fed bets on binge buying bonds to spur US economy
BackBack

Fed bets on binge buying bonds to spur US economy

As of 8 April, the total assets held by the US Federal Reserve, the American central bank, stood at $6.08 trillion, the highest they have ever been. The size of Fed’s balance sheet has rapidly expanded since the end of February. What’s happening here? Mint takes a look

A security guard walks in front of an image of the Federal Reserve (Reuters)Premium
A security guard walks in front of an image of the Federal Reserve (Reuters)

Why is the Fed balance sheet expanding?

Since 26 February, the total assets of the Fed have gone up by around $1.92 trillion, or 46.3%, to touch $6.08 trillion on 8 April (see chart below). The Fed is printing money and buying bonds. This is technically referred to as quantitative easing (QE). This has led to the US central bank’s total assets going up significantly in just 40 days. In the aftermath of the coronavirus disease, the US economy is in free fall. Between mid-March and 4 April, nearly 17 million Americans filed for jobless claims. Economists estimate that the US unemployment rate has crossed 10% from 3.5% in February.

Graphic: Paras Jain/Mint
View Full Image
Graphic: Paras Jain/Mint

What’s making the Fed print so much money?

The Fed is flooding the financial system by printing money and using that money to buy bonds from banks. With so much new money going around in the financial system, the hope is to reduce bond yields and interest rates. As of 31 December 2019, the yield (or the return) on the 10-year US government bond was 1.92%. It has fallen to 0.73% as of 9 April. Lower yields on government bonds mean lower interest rates in general, as lending to the government is deemed the safest form of lending. The idea is that at lower interest rates, people will borrow and spend and businesses will borrow and expand.

When was the last time the Fed did something similar?

As of 3 September 2008, when the last global financial crisis was about to break out, the total assets of the Fed had stood at $905.25 billion. By 1 October, as the Fed printed money and bought bonds, its total assets had jumped by 66% and crossed $1.5 trillion. The Fed continued to print money and buy bonds, with its total assets peaking at $4.5 trillion in January 2016.

What did the printing of money lead to?

While the Fed and the government thought people and companies would borrow at lower interest rates, the situation didn’t play out totally according to script. Companies borrowed to buy back their shares, driving up earnings per share and share prices in the process. Investors borrowed at low interest rates and invested in financial and real estate markets around the world. All this easy money led to global stock markets rallying in the aftermath of the financial crisis. The Indian stock market also benefited from this.

How do things look this time around?

Despite the Fed printing money through March, foreign institutional investors net sold Indian stocks worth 61,973 crore. They changed track last week and bought stocks worth 4,423 crore. If the Fed keeps printing money and US stock prices keep rising, at least in the short term, Indian stocks should also do well. Having said that, the Fed is in unchartered territory and is running an unlimited QE programme. History tells us that’s not going to end well.

Vivek Kaul is a Mumbai-based economist.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 12 Apr 2020, 11:21 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App