How effective is the Fed on the Economy?

As we enter our 7th bull market year, people are wondering when this run will end. This has been one of the longest sustained growth period in the United States as measured by the S&P500 (see graph below), but unlike the post war switch in the late 40’s/ early 50’s and the growth in tech in the 90’s, the growth does not appear to be organic. Since 2008, the Federal Reserve has bought $1.97 trillion of US Treasuries and $1.741 trillion of mortgage backed securities. This is well known as quantitative easing (“QE”), and this seems to have strong correlation to the growth in the US economy. Dating back from December of 2002 to today, the correlation between the balance sheet and the S&P 500 is .88. Although this is only one variable to consider, it seems to be statistically significant, and shows the power the Fed has on the American economy. 

Quantitative easing may have worked in the United States, but other major developed nations have not had the same economic effects. From the 1970 to 1990, Japan was the envy of the modern economic world. They had the highest productivity and their real-GDP was growing over 5%/year, but there was a slowdown in Japan’s economy in the early 90’s. Fast forward to today, Japan is a highly developed nation, but it has seen stagnating growth with substantial amounts of debt. Japan refers to quantitative easing as Abenomics - named after the Prime Minister Shinzō Abe.  Abenomics has had a similar effect for the economy, yet the success is not as strong as the United States. Sources: Bloomberg, Bank of Japan

There are a multitude of other variables to check on a macroeconomic level, but it is interesting to look at a country’s monetary policy.