So Goes The Fed's Balance Sheet, So Goes Risk Assets
As the Fed grows its balance sheet and therefore the money supply by purchasing bonds, equities (it is against the Fed’s charter to purchase equities but it did so in 2020) and extending loans, one can expect risk assets to rise. Given the enormous liquidity the Fed injected into the U.S. economy from 2020 - May 2022, it is no surprise that risk assets have significantly appreciated, especially those with a speculative bent such as the NASDAQ Composite. Therefore, while the chart below does not have a 1:1 correlation between the Fed’s balance sheet and the NASDAQ Composite, there is a directional correlation that exists between the two.
