Knights of the Fed

Many people have speculated whether the Federal Reserve is secretly buying equities on the stock market, but usually if you bring up this topic, you will be quickly dismissed as some kind of crazed conspiracy theorist.

But are these people right? Does the fed actually buy equities in the open market?

Well, sort of.

The fed is just an umbrella organization for a consortium of Federal Reserve “branches” that are owned by the banks and brokers; very similar to the Financial Industry Regulatory Authority and the Depository Trust & Clearing Corporation. 

The largest beneficiary of credit from the Federal Reserve is the New York Fed, which is a privately owned bank that is chartered by the U.S. government with the task of micro-managing interest rates through a process known as Open Market Operations.

The New York Fed is the only bank that is allowed to physically buy and sell treasuries in the open market. Everyday they will attempt to influence interest rates by conducting open markets operations at what they refer to as “The Trading Desk“.

The fed also provides credit for “repurchase agreements”, which is just industry lingo for a short term lending arrangement. These loans can be continuous, meaning that even though they typical only last for one day, they can still be refinanced on a daily basis.

source:https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/financial%20services/latest%20thinking/reports/global_corporate_and_investment_banking_an_agenda_for_change.ashx

The banks will then lend this money to institutional investors, who then buy products from the primary brokerage houses. As you can see in the snapshots pictured below, these brokers are soliciting money that they intend to invest into the Russell 2000, S&P 500, Dow Jones Industrial Average, and various ETF’s, which are just stocks from a particular industry group pooled into one fund. Hundreds of these transactions occur every single day.  

The fed even holds periodic committee’s with several of the biggest hedge funds and asset management firms (yes, Ray Dalio even shows up) who give advice and recommendations on how the fed should conduct monetary policy. They say it’s informal, but it seems like a bit of a stretch of the imagination to think that these meetings do not influence fed policy.

Why the fed feels the need to convene regular meetings with the largest recipients of their massive credit infusions strains credulity, and it should be obvious to even the most passive observer that their opinions should be considered highly conflicted.



So as to the question: “does the Federal Reserve buy stocks?”

…… they might as well.

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