Jamie Dimon Explains Why The Fed's Massive $US4.5 Trillion Balance Sheet Is Actually Small

Fed balance sheetFederal Reserve Board, Morgan Stanley ResearchFrom a recent presentation given by Morgan Stanley

Since the financial crisis, the Federal Reserve has been buying up bonds and other securities in its efforts to keep interest rates low and put cash in people’s hands.

While this has arguably been beneficial for the economy, the immense presence of the Fed has some folks freaked out.

“The Fed’s balance sheet has gone from $US1 trillion in 2007 to an estimated $US4.5 trillion by the end of this year,” noted JP Morgan CEO Jamie Dimon in his annual letter to shareholders. “Some feel the Fed’s QE policies have been too aggressive and ultimately will be inflationary. Additionally, there is a fear that ending QE will be risky and complex, particularly since QE has little precedence.”

“We cannot predict the future,” he added.

But he did offer some context in his efforts to calm down the worry-worts. From his letter:

The value of all financial assets in America today is approximately $US90 trillion. When the Fed stops buying securities, the $US4.5 trillion it owns will run off to $US2 trillion by 2020 simply from paydowns of principal in Treasuries and mortgages. While it is not clear what the new steady state will be — the Fed probably will not need to take its balance sheet all the way back down to $US1 trillion. Even if the Fed eventually needs to sell some securities, the American economy should be able to handle it easily — particularly in a strong economy.

In other words, Dimon is telling us that the Fed could conceivably trim $US3.5 trillion off of its balance sheet, but that amount would be pretty small relative to the $US90 trillion domestic financial market.

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