Republican presidential nominee Donald Trump blasted the U.S. Federal Reserve and Fed Chair Janet Yellen for being more "political" than his Democratic counterpart Hillary Clinton in Monday night's heated presidential debate.
Is he right? Is the Fed political in any way, shape, or form?
Fed officials, the vast majority of political analysts, and "a wide range of independent observers," according to The New York Times, "roundly rejected" Mr. Trump's "accusation."
But the truth is, the Federal Reserve is absolutely, positively political. It's in its DNA.
I'll prove it to you...
The Fed Began as a Political Tool
This isn't about Donald Trump being right. And it isn't about Hillary Clinton telling reporters on her campaign plane on Sept. 6, 2016, "You should not be commenting on Fed actions when you are either running for president or you are president. Words have consequences. Words move markets. Words can be misinterpreted."
This is just the bare naked truth about the Federal Reserve and how it operates.
Most people, including the majority of politicians in the United States, analysts, and journalists covering politics and the economy, and overseas observers, don't know what the Fed is.
They think as America's central bank it's a branch of the government. It isn't.
An example of the ignorance of even respected news outlets like The New York Times was front and center Tuesday.
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In a Times article titled "Scant Evidence to Support Trump's Attacks on the Fed," author Binyamin Applebaum writes, "The Fed is not independent. It is an arm of the federal government, chartered by Congress to maximize employment and minimize inflation."
The Federal Reserve System is privately owned by shareholders. It is not an "arm" or branch of the U.S. government.
It was conceived in 1910 by a handful of rich and powerful men including Sen. Nelson Aldrich of Rhode Island, well known as an agent of John D. Rockefeller, to whom he was related through a family marriage; J.P. Morgan & Co. partner Henry Davison; Paul M. Warburg, the principal partner at Kuhn Loeb & Co.; an American agent of Europe's richest, most powerful banking family, the Rothschilds; and National City Bank president Frank A. Vanderlip, at a clandestine meeting at the secluded Jekyll Island Club off the tip of South Georgia, partly owned by John Pierpont (J.P.) Morgan.
The senator and bankers designed the private central bank, which took three years to slide through Congress, to have the sole right to create Federal Reserve Notes (U.S. dollars), in other words, they own America's money supply, and to use their money to buy the government's debt whenever it was necessary to support federal operations and to support and backstop the big banks who were the shareholders in the new central bank.
The whole story of how the Fed was created, by who, for what purposes, and how it was greased to be twisted through Congress and institutionalized in law under the Federal Reserve Act of 1913 is one of America's dirtiest secrets. But the truth is out there.
As conceived, the Federal Reserve System is a political tool. It couldn't have come into being if political interests weren't satisfied.
The Fed Is Political - Whether It Acts or Not
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The Fed was meant to look to the outside world like it was above politics in order to be a "Reserve System" (not a bank, wink, wink) to backstop the financial system and maintain stable prices.
The so-called "dual mandate" which says the Fed has to "promote effectively the goals of maximum employment," in addition to stable prices, was only inserted into the Federal Reserve Act when in 1977 Congress punted its fiscal responsibilities to the Fed because it was tired of being blamed for "stagflation" plaguing the country.
But that doesn't mean the Fed isn't political.
Politicians constantly threaten the Fed with audits, greater congressional oversight and control, and on rare occasions threaten to abolish it.
Since Congress has the ability to legislate the Fed out of existence, successive Federal Reserve chairmen, FOMC members, and regional bank presidents have had to play ball with whichever party's administration is in power.
Donald Trump maintaining that "they're keeping the rates down so that everything else doesn't go down" and saying "the Fed is being more political than Secretary Clinton" isn't a stretch.
The Fed announced last December, when it raised the federal funds rate one quarter of one percent, its first rate hike in nine years, it was looking to hike four times in 2016.
After a hiccup through February when stocks and bonds fell sharply, stocks made multiple new all-time highs, and bonds are booming again. And still there's no rate hike.
No doubt, the Obama administration and Hillary Clinton remember when in October 1979, right before the presidential election between Jimmy Carter and Ronald Reagan, the new non-partisan Fed chair, Paul Volcker, changed the Fed's policy objectives and rates soared.
Jimmy Carter lost hands down.
In terms of the metrics the Fed says it watches, there was no reason for it not to raise in September unless, of course, there were political motivations.
Of course there were. Especially in light of Donald Trump criticizing and threatening the Fed.
Saying the Fed isn't political is like calling the Grand Canyon a ditch.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.