“Unlimited QE & emergency liquidity programs should see the Fed balance sheet double in size over 2020,” Mark Cabana, rates strategist at Bank of America Global Research, said in a note.
The Fed had originally indicated it was going to add $700 billion to its bond portfolio — $500 billion in Treasurys and $200 billion in mortgage-backed securities. However, it switched earlier this week to
an open-ended program in response to tumult in financial markets.
Wall Street now anticipates the balance sheet could hit $10 trillion this year as the Fed affirms its
whatever--it-takes commitment to softening the coronavirus blow. Fed Chairman
Jerome Powell told NBC’s “TODAY” show Thursday that the central bank will “aggressively and forthrightly” continue its efforts
and will not “run out of ammunition.”
That means the balance sheet likely will hit $7 trillion by June, or about a $2.5 trillion gain from its previous peak, according to Citigroup. Ultimately,
Wall Street forecasts are increasingly looking for a $10 trillion balance sheet that would signal a $4.5 trillion expansion, greater than the $3.7 trillion growth during and after the financial crisis.
Critics have worried about the possibility of inflation resulting from all that extra cash in the system, though it hasn’t been a problem since the asset purchases started in late 2008.
“Markets will have learned well from the 2008 experience that this increase in balance sheet size is not inflationary in any near-term sense,” Citigroup economist Andrew Hollenhorst said in a note. “In fact, the sharp drop in demand and prices for certain services and energy implies a significantly lower trajectory for both core and headline inflation.”