Don't fight the FED

Discussion in 'Business & Economics' started by sculptor, Jun 16, 2017.

  1. sculptor Valued Senior Member

    Messages:
    4,416
    Old saying : "Don't fight the FED"

    They seem to be on a tightening course now.
    And indicating an effort to unwind their 4.5 trillion dollar balance sheet.
    (which, I suspect, means that they ain't gonna reinvest in treasuries-------------accurate?
    Which means bad news for the bond markets-----accurate?)

    OK
    so
    Will the equities markets inevitably fall during the course of their tightening?

    .................
    Time to divest or go short?
     
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  3. joepistole Deacon Blues Valued Senior Member

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    The Fed has been tightening for some time now. Interest rates are rising, and whenever interest rates are rising it's a bad time to own debt, especially long term debt. When interest rates rise; bond prices fall.

    We don't know exactly how the Fed will unwind its balance sheet. Unwinding means they will not be investing in anything. We don't know what impact the unwinding will have because the Fed hasn't told us how they intend to unwind their balance sheet. I sincerely doubt they will sell all or even a significant portion of their balance sheet. Before the Great Recession began the Fed had 2.5 trillion on their balance sheet. I expect it will be a gentle and slow unwinding. Unwinding will drive bond prices down, and interest rates up.

    Rising interest rates are not good for stocks. There is no doubt about. But all stocks are not the same. Some stocks benefit, others do not. Banks benefit, industrials don't. But on the good side, the economy is growing, and if the Fed does it correctly, economic growth will offset increases in interest rates.

    Rising interest rates should not cause equities markets to fall during the Feds tightening. It will however constrain growth. With unemployment so low, the danger now becomes inflation. Already, we are seeing shortages in the labor market. Home builders can't build homes fast enough because of labor constraints.

    It's not time to divest or short the market. The biggest risk to the market at the moment is Trump. The market had expected a huge fiscal stimulus package from Trump. Trump had promised trillions in fiscal stimulus and he hasn't been able to deliver. And it's not looking like he will ever be able to deliver.

    We are looking at continuation of the modest growth we saw during Obama's administration. We aren't looking at the aggressive 4% growth Trump had promised, because he hasn't been able to deliver his stimulus package and labor is in short supply. In that environment technology wins. In a low growth environment markets will place a premium on large cap high growth stocks.
     
    Last edited: Jun 16, 2017
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  5. river Valued Senior Member

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    The " fed " is private . The federal government has NO control of the federal bank of the US at all .
     
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  7. joepistole Deacon Blues Valued Senior Member

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    Except that just isn't true comrade. The Fed is an agency of the US government. It's charted and operated by the US government. The US government appoints the board of governors, and the Federal Reserve reports to the US Congress at a minimum of twice a year. Any profits earned by the Federal Reserved are transferred to the US Treasury general fund. I hate poke holes in your conspiracy theories. But the truth is the truth.

    Now you are going to tell my about how the "shares", and how member banks get to elect the Federal Reserve Bank president in their area. Don't bother, I've heard those stories many times before. While there is some truth to those stories; they only tell a part of the total story. The unfortunate bottom line for you is the Federal Reserve is an agency of the Federal Government. The Federal Reserve was created by the US government and is operated by the US government. Fed leadership is appointed by the POTUS and approve by the Senate. And the US government receives any profits earned by the Fed.
     
  8. river Valued Senior Member

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    9,182
    But the " federal bank " is private.

    Which is my point .
     
  9. iceaura Valued Senior Member

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    24,050
    It is not formally an agency of the US government - only its Board of Governors, more or less equivalent to a Board of Directors, is. It is not owned or operated by the US government - the "operations" include the doings of the Open Market Committee, for example. It pays dividends of 6% to its private capitalist owners on their private capital invested, and only after that do remaining profits (whose calculation is neither transparent nor straightforward) transfer to the US Treasury. The employees of the member banks are not covered by Civil Service regulations and scales, as they are not employees of the US government. And so forth.
     
  10. joepistole Deacon Blues Valued Senior Member

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    What the hell does that mean Iceaura? How the hell is it not "formally an agency of the US government"? How does that even make sense? You are a fraud Iceaura. You know nothing, but hey, you don't let that stop you from pretending you do.

    I've instructed you on this issue a number of times, and you just cannot get it through your thick head, "and so forth". Once again for your edification:

    "The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.

    The Federal Reserve derives its authority from the Congress, which created the System in 1913 with the enactment of the Federal Reserve Act. This central banking "system" has three important features: (1) a central governing board--the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics.

    The Board of Governors in Washington, D.C., is an agency of the federal government. The Board--appointed by the President and confirmed by the Senate--provides general guidance for the Federal Reserve System and oversees the 12 Reserve Banks. The Board reports to and is directly accountable to the Congress but, unlike many other public agencies, it is not funded by congressional appropriations. In addition, though the Congress sets the goals for monetary policy, decisions of the Board--and the Fed's monetary policy-setting body, the Federal Open Market Committe--about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government." - The Federal Reserve https://www.federalreserve.gov/faqs/about_14986.htm

    PS: Not all federal employees are in the Civil Service System, e.g. uniformed members of the US military. Some federal agencies are not apart of the US Civil Service System.

    "The General Schedule (GS) includes white collar workers at levels 1 through 15, most professional, technical, administrative, and clerical positions in the federal civil service. The Federal Wage System or Wage Grade (WG) schedule includes most federal blue-collar workers. As of September 2004, 71% of federal civilian employees were paid under the GS; the remaining 29% were paid under other systems such as the Federal Wage System for federal blue-collar civilian employees, the Senior Executive Service/Senior Level and the Executive Schedule for high-ranking federal employees, and the pay schedules for the United States Postal Service and the Foreign Service. In addition, some federal agencies—such as the United States Securities and Exchange Commission, the Federal Reserve System, and the Federal Deposit Insurance Corporation—have their own unique pay schedules. " https://en.wikipedia.org/wiki/United_States_federal_civil_service

    How civil servants are are managed or the system used to manage them isn't determinate of whether an organization is or isn't a federal agency. For your edification, some Federal Reserve System employees are covered by the Civil Service System, and some are not. Employees of the Federal Reserve Board of Governors are covered by the US Civil Service system but they have their own rules and pay schedules.
     
    Last edited: Jun 17, 2017
  11. iceaura Valued Senior Member

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    24,050
    By the fact that it's not an agency of the US government. Agencies of the US Government have a certain formal, legal structure - their employees are government employees, they are funded by Congressional appropriation, their books are audited by the appropriate government agencies, they have certain legal liabilities and immunities in the performance of the duties, and so forth. The only aspect of the Federal Reserve system that meets them is the Board of Governors.

    You can see a similar situation with things like a US State Public Utilities Commission - an agency of a government, with oversight and regulatory powers over industries that often are not government agencies at all.
    Yeah, I noticed. There's a fair list of such matters in which you have instructed me in your typical fashion, and this is one of them. It usually doesn't matter much, but in this case there are some significant implications in the fact that the Central Bank of the United States is not a government agency. It's a fairly unusual situation, in the modern industrial age, for a State to have contracted out it's central banking.
     
  12. joepistole Deacon Blues Valued Senior Member

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    And how is that a fact? Where is the evidence? The fact is you have none, because none exists. Can you not read? Did you not read my previous references? The Federal Reserve and other references clearly state the Federal Reserve is an agency of the US federal government. Are you invoking some sort of mass conspiracy here to misrepresent the status of the Federal Reserve?

    As been repeatedly pointed out to you Federal Reserve employees are employees of the Federal government. Oops. Are you having trouble with reading comprehension again or are you just being dishonest again?

    Two, as has been repeatedly pointed out to you, some government agencies are self-funding. They are government operated businesses, e.g. Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Farm Credit Administration (FCA), Federal Housing Finance Agency (FHFA), Public Company Accounting Oversight Board (PCAOB) and others. The fact that they are self-funding doesn’t make them any less of a government agency.

    I suggest you look up the meaning of the word agency; it has nothing to do with how agencies are funded.

    Yes, public commissions are agencies of state and local governments, and many of them are self-funding just like the Federal Reserve, e.g. Texas Railroad Commission, the Kansas Corporations Commission, etc. Oops. Just because the Federal Reserve is self-funding, it doesn't negate the fact it is an agency of the federal government. It doesn't negate the fact that the Federal Reserve was created by the US government and is operated by the US government through the US Congress and its appointed officials.

    You have contradicted yourself again. Self-funding state regulatory agencies are agencies, but the self-funding federal agencies are not? Surely even you have to recognize the absurdity of your assertion.

    I suggest you do a little research. I have provided you sufficient resources. You are a fraud Iceaura, and no one should take you seriously. The US has not contracted out its monetary policy.
     
    Last edited: Jun 17, 2017
  13. sculptor Valued Senior Member

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    4,416
    Getting back to the subject of the op:

    I could argue that the fed/fomc is pretty good at creating market crashes, and not so good at bringing us out of recession.
    in 2007, the fed raised rates in an effort to prick the bubble in/of the housing market. They succeeded in creating the crash of 2008 wherein many large banking houses went bust, along with millions of borrowers who found that they owed more on their property than the property was worth.
    It seems most likely that in keeping interest rates low, the fed encourages borrowing which causes bubbles. Then the fed raises rates to prick the bubbles and markets crash.

    This from guys who make money by shorting the markets:
    The fed held rates low since the crash they caused in 2008
    And now the want to "unwind"

    The S&P 500 tracks the money supply close to a 1:1 correlation

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    As the money supply shrinks, what will the s&P do?
    ................
    The stated goal of the fed is to reduce their 4.5 trillion dollar balance sheet. at the rate of about 6 billion per month, with incremental raises up to 30 billion/month to get back to the pre 2008 level of 800 billion. (is that a 10 year plan?)As the treasuries and mortgage backed securities they hold mature, they have been rolling the money over into new treasuries and securities. To meet their goal, they will simply not buy new treasuries and securities.
    Currently, sovereign debt is the 500 pound gorilla in the room.
    If the fed ain't gonna buy more debt, then the us will find it difficult to continue business as usual.
    True?

    so
    what next?
     
    Last edited: Jun 17, 2017
  14. joepistole Deacon Blues Valued Senior Member

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    22,874
    Except, that never happened. The Federal Reserve didn’t raise rates in 2007 much less “prick any bubbles”. It’s not the Fed’s job to “prick bubbles”. We don’t have a Greenspan Federal Reserve. The Federal Reserve actually lowered interest rates 3 times in 2007.

    https://www.federalreserve.gov/monetarypolicy/openmarket.htm

    Two, the Housing Crisis or Great Recession of 2007-2009 wasn’t caused by the Fed; it was caused by the repeal of Glass-Steagall in 2000 which deregulated the banking industry. Glass-Stegall was a set of post Great Depression financial reforms intended to prevent another Great Depression. The repeal of Glass-Steagall which had successfully prevented banks from gambling with investor money for almost a century quickly led to a banking crisis and a near Great Depression 2.0.

    Except, there is no evidence of that; between 2003 and 2006 the Fed had been aggressively increasing interest rates as stock markets rallied. The Fed raised interest rate during that period, not to pop bubbles, but to contain inflation. Remember the definition of inflation, “too many dollars chasing too few goods and services”.

    First, you should never believe guys who make their money from shorting the markets. They are infamous for “talking their book”, i.e. manipulating less sophisticated investors to their advantage. Two, the chart you showed isn’t a one to one correlation as asserted. Three, correlation isn’t evidence of causation.

    Actually, the Fed began lowering interest rates in 2007. And there is no evidence the Fed caused any crash, much less the Great Recession. The Federal Reserve didn’t cause banks to make risky investments in mortgage derivatives; banks did that all on their own. The repeal of Glass-Steagall which would have prevented those “investments” and the Commodities Futures Modernization Act of 2000 which allowed those “investments” set stage for what would become The Great Recession.

    The irony here is that congressional Republicans and a Republican POTUS are setting the stage for Great Recession 2.0 by attempting to repeal Dodd-Frank: legislation implemented after the Great Recession to prevent another Great Recession.

    Now this is really difficult for Republicans or self-described “conservatives” who are anything but conservative, because it’s antithetical to their ideology, but the truth is deregulation caused the Housing Crisis.

    No. Now they want a return to normalcy. They want moderate growth and low inflation.

    Except it isn’t, and the chart is irrelevant.



    What the S&P does will depend on many things. Ceteris paribus, all things being equal, stock markets will continue to grow, but at a reduced pace, and inflation will remain at 2% or less.

    And?

    Sovereign debt isn’t a problem now, but it could be down the road. We have many options. Unfortunately, this administration and this Congress seem unwilling to do anything to seriously address the issue.

    False, the US doesn’t need the Federal Reserve to purchase debt. US interest rates will rise, but will still be low by historical standards. We aren’t looking at double digit interest rates a la late 70s and early 80s. We are looking at a return to historical norms.

    Should economic circumstances change, I'm sure the Fed will change their policies as appropriate. That's what they have done in the past and their is no reason to expect that will change. Just because they "ain't gonna buy more debt" today, doesn't mean they won't buy more debt a month from now or a year from now as circumstances change.

    Ceteris paribus, it’s a return to normal. The great unknown is what this Republican Congress and administration will or will not do. That’s the greatest risk to our economy. The global economy is growing and the US economy is growing and has been for the last 8 years.

    If congressional Republicans succeed in repealing Dodd-Frank we are looking at another Great Recession in 7 or 9 years. If Republicans cause a debt default, we are looking at a dramatic decline in the economy and stock market. What’s next depends upon what Republicans do or don’t do. I don’t have a crystal ball, and I don’t know anyone who does.
     
    Last edited: Jun 17, 2017
  15. iceaura Valued Senior Member

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    The twelve branches of the US Federal Reserve are largely operated by private capitalist investors and their chosen executives - similar to a private utility company.
    Not "nothing". Source of funding was one of a half dozen items of evidence for you to consider.
    No, they aren't. Only the Board of Governors is a federal agency, with employees working for the US government.
    I can't help the vocabulary used by careless Wikipedia authors. Others are more careful: https://en.wikipedia.org/wiki/Structure_of_the_Federal_Reserve_System

    You've seen all this, of course, and more - I made the mistake of spending some time getting into the details and finding the best links for you , last go'round, but no reason to repeat that waste of time.
     
  16. iceaura Valued Senior Member

    Messages:
    24,050
    The idea that the Fed's attempt to prevent that crash caused it instead is Republican Party bs.

    The bubble was the cause of the crash, not the Fed. All bubbles crash, one way or another. And the big bubble that crashed everything was in derivatives and the financial market, not real estate and the housing market - the bad fraction of the housing market, for example, was simply too small to do that kind of damage.
     
  17. joepistole Deacon Blues Valued Senior Member

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    22,874
    Well, first, they aren’t branches. They are districts. And they aren’t largely operated by private capitalist investors. They are a part of the Federal Reserve System and are subservient to the board of governors. They don’t set Fed policy. They are clearing house operations. Federal Reserve districts aren’t even remotely like a “private utility company”. The regulate nothing. They process banking transactions.

    No, it was your lame ass justification for your assertion that the Federal Reserve isn’t an agency of the federal government. As I have repeatedly pointed out to, your assertion doesn’t hold water.

    LOL…Well we are making progress. So now, after so many denials, you admit the Federal Reserve Board of Governors is a federal agency. That’s progress. Let’s see how long it lasts.

    The Federal Reserve District employees are also government employees. From your reference, “The Federal Reserve Banks (i.e.district banks) act as fiscal agents for the U.S. Treasury”.

    The only one who has a careless problem with the vocabulary is you. As previously pointed out to you, it’s not just Wikipedia and its references; it’s the Federal Reserve as well. Contrary to your prior assertions, the Federal Reserve is an agency of the US federal government.

    You have repeatedly made the mistake of making fraudulent representations. I don’t need your stinking links. YOU need to read your stinking links and begin being honest.
     
  18. iceaura Valued Senior Member

    Messages:
    24,050
    The actual banks we are talking about are called "branches" - one of the twelve main buildings called the "main branch", say - quite often. And they are in fact operated largely by executives chosen by their private capitalist investors. https://en.wikipedia.org/wiki/List_of_Federal_Reserve_branches
    The Federal Reserve banks are, in many ways. So is the system as a whole.
    So now we know how many times I have to repeat something simple before it registers in your awareness - Three. Posts 6, 8, and 13, in this case - every post I've made in this thread.

    Not counting all the other times I've tried to explain this very simple matter to you, obviously, making that identical point over and over and over.
    The Board of Governors is a Federal agency - and that distinguishes it from the rest of the Federal Reserve system. The Federal Reserve System is overseen - not operated, overseen - by a Federal agency created for the purpose.

    It's a unique setup for the central bank of an industrial nation - worth examining. We know that several countries have increased their prosperity and economic stability in various aspects by taking their central banks into the government and making them government owned and/or run - (Sweden, Canada, Norway) - and others by making them fully independent private concerns (Switzerland, Denmark). The reverse has also occurred, with both private and government owned/run central banks screwing up and creating problems.

    And hybrid setups also, of course. There appears to be no magic bullet setup.
     
  19. sculptor Valued Senior Member

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    4,416
    You're right, I was wrong.
    I was thinking of the 17 straight raises through 2006.
    Once the bubble burst, they lowered through 2007 and 2008, then basically stood pat at a 0-25% rate until dec 2015............

    It seems that the fed has little to no power to stimulate the economy.
    But much power to crash it.
    Many economists believe that the low rates of the '20s encouraged borrowing on margin which led to the crash of 29
    The low rates of 2008-2015 may have been instrumental in the rise of the S&P.
    If so, then the reverse direction may show up in the S&P valuation within the next year?
     
  20. joepistole Deacon Blues Valued Senior Member

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    22,874
    Just to be clear, there were no interest rate increases in 2007.

    Using the term "bubble" is misleading. It obscures what really happened. The Fed began lowering interest rates before the recession began. The recession began in December of 2007, but the Fed began lowering interest rates in September of 2007.

    That's just not true. When Republicans took over the House in 2011 it resulted in fiscal paralysis leaving the Fed the only game in town. Were it not for the Fed's actions we would still me mired in recession. Lowering interest rates isn't the only thing the Fed did. It also expanded the money supply by buying debt. The Great Recession didn't become the Great Depression 2.0 because of fiscal actions taken the Bush 2 and Obama administrations and actions taken by the Federal Reserve.

    And who are these many economists? Most credible economists don't share that belief. For starters; the low interest rates of the 20s weren’t that low by historical standards. From 1929 to 1957 interest rates were lower than they were during the 20s.

    Bad banking practices cause depressions; low interest rates don’t. That’s why Glass-Steagall was created and, for almost a century, successfully prevented a reoccurrence of another great depression.

    As previously pointed out, higher interest rates are a head wind and will work against higher equity prices. But if the Fed does its job correctly, and there is no reason to believe otherwise as this Fed has been very good at predicting the economy, it will not cause equity prices to depreciate.

    The danger to equity market lies with the Republican Party, not the Federal Reserve. If Republicans cause a debt default as they have attempted to do in the past that will cause economic chaos. If they implement their healthcare bill (Trumpcare) as currently written, that will adversely affect the economy. Most of the job growth has been in the healthcare industry. If Republicans take a trillion dollars out of healthcare and give it to the wealthy; that will have some serious adverse effects on the economy. If they restrict immigration and deport millions of illegals as they have threatened to do; that will have a significant adverse effect on the economy.
     
  21. joepistole Deacon Blues Valued Senior Member

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    22,874
    Just as a followup. The Fed discount rate was 14% in 1981, and there was no depression or recession. The Fed discount rate was 6% before the Great Depression. Before the Great Recession of 2007-2009 the Fed Discount Rate was 5.25%.

    Bad banking practices caused both the Great Depression and Great Recession. It wasn't high interest rates. Banks and shadow banks seeking higher profits took on higher risks. In this century that higher risk took the form of derivative securities which was only made possible by the repeal of Glass-Steagall and the enactment of The Commodities Futures Modernization Act of 2000.
     
    Last edited: Jun 19, 2017
  22. iceaura Valued Senior Member

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    24,050
    It was the other way around in the US from 2000 - 2010: the Fed was almost powerless to curb or crash the insanity in the financial markets until it blew apart on its own, and the only major Fed influence was as stimulus generator - keeping an economy drained of normal productive investment by a parasitic financial bubble from imploding into a jobless hollow.
     
  23. joepistole Deacon Blues Valued Senior Member

    Messages:
    22,874
    No, they are called districts or Federal Reserve Banks. They aren’t called branches. Each Federal Reserve Bank can have branch offices. Branch offices don’t have an individual board of directors. They don’t have a separate governing structure, so either you aren’t being honest or you are intellectually challenged or perhaps both.

    For your further edification:

    https://www.federalreserve.gov/aboutthefed.htm

    Notice the word “bank” is used and nowhere is the word “branch” used.

    And in what way are they like utilities? Please do explain. It’s increasingly apparent, you don’t know what Federal Reserve Banks do.

    So, you are back to this crap again…outright lying.

    Your post #6: “It (referring to the Federal Reserve) is not formally an agency of the US government”.

    Your post #8: By the fact that it's (referring to the Federal Reserve) not an agency of the US government.

    Your post #13: The idea that the Fed's attempt to prevent that crash caused it instead is Republican Party bs.The bubble was the cause of the crash, not the Fed. All bubbles crash, one way or another. And the big bubble that crashed everything was in derivatives and the financial market, not real estate and the housing market - the bad fraction of the housing market, for example, was simply too small to do that kind of damage.

    You post #13 is addressed to Sculptor and had nothing to do with whether the Federal Reserve is or is not an agency of the federal government. Oops! You got caught lying again.

    I’ve corrected you several times, and after several denials on your part, you changed your story. And now you are pretending you always were of the opinion the Federal Reserve is an agency of the federal government. You aren’t being honest as you are wont to do.

    You aren’t being honest, either that, or you are incredibly confused.

    It helps if you understand what you are trying to explain, and clearly you don’t. For your edification:

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    https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

    Pay particular attention to the organization charts.

    Now you are trying to have your cake and eat it too….it’s an agency of the federal government, but parts of it aren’t. You are desperately trying to split hairs. It’s one system and one agency.

    As has been repeatedly pointed out to you the Federal Reserve Board of Governors governs the Federal Reserve System. It’s one system. It’s one agency. The “Federal Reserve Banks are the operating arms of the Federal Reserve System, and are supervised by the Board of Governors”. You do understand what that means? It’s one system. It’s the Federal Reserve and contrary to your assertion it is an agency of the US government.

    The US central bank is government owned and run too. Oops.
     
    Last edited: Jun 21, 2017

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