The Federal Reserve is determined to support the economy and the normal functioning of capital markets during the COVID-19 pandemic. As of April 29th, the total asset size of the Fed’s balance sheet reached $6.66 trillion dollars, almost doubling from $3.76 trillion at the end of August last year. The Fed’s balance sheet now stands at over 30 percent of GDP, the highest level in at least 30 years, and higher than it was during the Great Financial Crisis.
Fed buying began in September of 2019 when problems in the REPO market caused the Fed to step in with support. More recently, as the demand for liquidity surged in response to the pandemic, companies moved to increase cash holdings and highly liquid assets. The Fed stepped in again, aggressively buying $75 billion of Treasuries daily to free up dealers to better perform their role as market intermediaries. As spreads have narrowed and markets appear to be returning to something resembling normal, the Fed is expected to end its purchases in early May, with all liquidity-related measures since mid-September amounting to $2 trillion. However, as the Fed moves from restoring liquidity to stimulating economic activity, the Fed balance sheet is expected to continue to grow while effective interest rates remain at or close to zero. The Fed’s direct or indirect lending to corporations, municipalities and the paycheck protection program will likely account for the largest portion of balance sheet expansion, with the size of these programs largely dependent on the depth of the economic contraction.