By Graham Summers, MBA | Chief Market Strategist
The Federal Reserve (or “the Fed” for short) is supposed to be a politically independent entity.
Political commentators are outraged that Federal Reserve employees donated $10 to Democrats for every $1 to Republicans during this latest election cycle. As you can imagine, this has resulted in numerous accusations of the Fed being a left-leaning or Democrat controlled entity.
Those accusations are true.
However, the reality is that the Fed’s political actions are far greater than the mere $552,000 Fed employees donated to the left in the last four years. Indeed, in the last 15 years alone, there have been at least FOUR occasions during which the Fed engaged in monetary policies that were questionable at best, given the political context.
For those of us who track these things, the Fed:
- Influenced the 2012 Presidential race to aid the Obama Administration’s re-election bid.
- Damaged the economy/ financial system on purpose in 2017-2018 as an act of defiance against President Trump
- Claimed inflation was “transitory” despite mountains of evidence to the contrary, only to then abandon this claim as soon as Fed Chair Jerome Powell was reappointed by President Biden.
- Announced a new focus on climate change/ DEI/ leftist political interests despite those issues being outside the scope of the Fed’s mandates.
Let’s dive in.
First and foremost, consider that in 2012, the Bernanke-led Fed announced QE 3, its largest QE program in history at the time (an $80 billion per month, open-ended program), a mere THREE MONTHS before the U.S. Presidential election.
Bear in mind that the U.S. economy was growing, and the U.S. financial system wasn’t under significant duress at the time. Also bear in mind that the Fed did this within 90 days of a Presidential election.
In this context the decision to launch the largest QE program to date was blatant political interference to aid the Obama Administration’s re-election bid by boosting the stock market and economy. Even if you’re inclined to give the Fed a pass for this, you can’t argue that given the data and the timing, the move was suspect.
A second example of Fed political bias concerns its major shift in monetary policy once Donald Trump became President in 2017. To fully grasp this, we need to provide a little historical context.
Between 2008 and 2016, the Fed engaged in eight years of extraordinary monetary easing, maintaining interest rates of 0.25% (zero), and engaging in over $3 trillion worth of QE. Bear in mind that throughout this time, the U.S. economy was technically NOT in recession. Economic growth was steady:
And the unemployment rate was in a clear downtrend:
Once the Fed actually ended easing, it embarked on one of the feeblest campaigns of tightening monetary policy in history, raising rates only one time in 2015 and 2016 each. To put this into context, during a normal cycle, the Fed raises rates by three or four times per year.
Then Donald Trump won the 2016 Presidential election, and suddenly the Fed “got religion” about normalizing monetary policy. It raised rates three times in 2017 and another four times in 2018. In 2018, it also began shrinking its balance sheet via a process called Quantitative Tightening or QT. It would ultimately drain $500 billion in liquidity from the financial system via QT in 12 months.
All the above represent quite a shift considering the Fed had maintained rates at or close to ZERO for eight years prior to this. And this shift ended up damaging the economy and stock market.
Throughout 2016-2018, the Fed ignored numerous signals that this pace of tightening was placing the financial system under duress, right up until the junk bond market froze and the U.S. stock market crashed 20% during the holidays in December 2018.
For those who would argue that the Fed’s sudden shift from maintaining easy monetary policy for the better part of a decade to aggressively normalizing policy in the span of 20 months had nothing to do with Donald Trump being President, consider that former Fed Vice Chair Stanley Fisher admitted in an interview that the Fed’s raising rates in December 2018 was done specifically to hurt the economy because the Fed was annoyed with President Trump’s constant tweeting about them.
We’ll detail the final two politically egregious Fed actions in tomorrow’s article. But for now, the above examples alone are enough to definitively show the Fed IS a political entity and it DOES lean to the left.
Now Donald Trump is President once again. And he is going to exact vengeance on the Fed.
This is going to have a profound impact on the economy and stock markets. Our Chief Market Strategist, Graham Summers, MBA will be hosting a webinar addressing this situation next Friday, November 22nd at 1PM.
During this webinar, Graham will detail Trump’s proposals for reorganizing the Fed, who are the likely candidates for the next Fed chair, and what this will mean for the financial system and stock markets including specific investment strategies to profit from these developments.
This webinar will available to the general public for $49.99…
However, as a Gains Pains & Capital subscriber, you can reserve a place for just $9.99.
To do so…
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