When the Federal Reserve was instituted back in 1913, it came into being with just two primary mandates. The first was to curb inflation through the adjustment of interest rates, and the second was to be a lender of last resort for troubled banks in need of liquidity. Over time however, Congress pushed a third mandate onto their balance sheet, which was to ensure full employment in the economy.
But after the stock market crash of 1987, the Fed became involved in a new area of the market that was never part of their mandate… propping up and protecting equity values in the stock markets. And while most of that work was relegated to the government run Plunge Protection Team (PPT) from the 80’s onward, it wasn’t until the Credit Crisis of 2008 and the implementation of Quantitative Easing that the central bank’s thrust into the stock markets became a near daily excursion.
So this now begs the question… just how does the Fed manipulate stock prices if they have no legal authority to do so, and no mandate at all to get involved in equities? The answer appears to lie in a loophole that is facilitating their use of other central banks to do their work for them by supplying necessary funds to foreign banks to purchase stocks on U.S. exchanges.