INVESTMENT UPDATE

Chart of the Month: Huge financial stimulus

  • 15 October 2020
  • 5 mins reading time

Huge financial stimulus

Data shown: The total value of assets held by the Federal Reserve. Source: Schroders Personal Wealth/ Bloomberg, 14 October 2020

This chart provides an indication of how much financial stimulus is being provided by central banks. The sharp increase since the beginning of the pandemic is clear.

The Federal Reserve or “Fed” is the US equivalent of the Bank of England. In addition to bringing interest rates down to near-zero levels, the Fed has been electronically “printing” huge amounts of additional cash into the financial system to help make borrowing more easily and cheaply available to households and businesses.

In simple terms, the process works as follows: The Fed has the ability to print new, additional bank notes. Rather than switching on the printing presses, these days it can just add some numbers to its electronic bank account and use that new money to buy assets. Those assets are predominantly low-risk rated bonds that might be held by large financial institutions. The Fed will offer an attractive enough price to persuade the institutions to sell some of those bonds, leaving those institutions with cash that they can, in theory, use to lend to households and businesses, or to replace the assets they’ve sold.

There is a close relationship between the total value of assets that the Fed has bought (as shown in the chart) and the amount of financial stimulus delivered through this electronic printing or “quantitative easing” process.

Before the financial crisis over a decade ago, the Fed’s balance sheet ticked along at around $1,000 billion or $1 trillion. It’s now seven-times that.

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Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment,

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