Is the Fed Really Independent? How Will It Respond to Oil and Mineral Price

Shocks?

By Victor Sperandeo with the Curmudgeon

Introduction:

With last Wednesday’s announcement that Jerome Powell will remain as a voting member of the FOMC, Democrats will continue to be in control of U.S. monetary policy. There is no immediate indication of a shift in voting dynamics or monetary policy control. As such, markets should assume continuity in the Fed’s reaction function in the near term. See Market Implications subhead below.

The only obstacle left is the delay in the Supreme Court's decision if FOMC member Lisa Cook can be fired for committing fraud by lying on her mortgage application to get better interest rates on the three homes she owns. Her legal team has denied the fraud allegations. Ms. Cook maintains that the FED is INDEPENDENT and so a U.S. President cannot fire her.

Several questions arise from this case: Is the Fed legal/Constitutional? Is it really independent? If so, who oversees the Fed and how is that done? Let’s address each of those questions now.

Discussion of the Fed’s Legality:

The “Federal Reserve Act of 1913” is a Congressional statute that has never been judged by the Courts as being in alignment with the U.S. Constitution. Perhaps, it’s because the Fed bows to political interests by essentially “bribing” voters with printed money (AKA “keystroke entries”).

Victor submits that the Fed is 100% unconstitutional, according to Article 1, Section 8, Clauses 8 and 10 of the U.S. Constitution - the “Supreme Law of the land.” Here’s why:

· The authors of the Constitution never envisioned a central bank, let alone one that was privately owned like the Fed.

· Article I, Section 8, Clause 5 ("To coin Money, regulate the Value thereof...") specifically delegates the monetary power to Congress, which cannot be delegated to a private or quasi-public central bank.

· The 10^th Amendment explicitly reserves powers not specifically delegated to the federal government to the States respectively, or to the people.

· The Constitution reinforces that the federal government is one of limited and enumerated powers. If a specific power is not listed in the Constitution (such as in Article I, Section 8), it technically does not belong to the national government.

Is the Fed Really Independent: Political Affiliation of Fed Economists Says NO!

A late 2021 study by Emre Kuvvet found that Democrats greatly outnumber Republicans at the Fed.

Selected findings from the study:

"There are 208 Democrat and only 20 Republican economists at the Federal Reserve System. One hundred forty-six economists have no party affiliation, and 410 are not registered to vote. Only one economist at the Federal Reserve System is a registered Libertarian. Overall, the Democrat to Republican ratio for the economists at the Federal Reserve System is 10.4 to 1. In other words, for every Republican economist at the Federal Reserve System, there are ten Democrats. Economists at the Federal Reserve System are overwhelmingly left-leaning."

“There are 89 Democrat and 4 Republican economists in leadership positions at the Federal Reserve System. Thus, the Democrat to Republican ratio for the economists in leadership positions at the Federal Reserve System is 22.25 to 1. There are also 119 Democrat and 16 Republican economists in non-leadership positions at the Federal Reserve System. The Democrat to Republican ratio for the economists in non-leadership position at the Federal Reserve System is 7.44 to 1.”

“At the Fed Board of Governors, there is only one Republican economist in the leadership position, while there are 45 Democrat economists in leadership positions. Thus, the Democrat to Republican ratio for the economists in leadership positions at the Board of Governors of the Federal Reserve System is 45 to 1.”

In conclusion, Kuvvet writes: “Political and value judgements of the Fed’s economists’ publications and analysis could be linked to their ideological backgrounds. This is concerning, as the political homogeneity of Fed economists can undermine the legitimacy of their policy recommendations and analysis in the eyes of the public. That is, the public may see the Fed as a political institution, undermining the non-partisan and independent nature of the Fed.”

“In addition, scholarly works often reflect the political biases of the scholars in specific fields and highlight the ideological uniformity of scholars in those fields. Thus, economists at the Fed who do not share the majority political view may refrain from expressing dissenting views in their research and policy recommendations, resulting in a lack of competition in new ideas on monetary and financial policies at the Fed.”

àSo much for Fed independence?

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Who Oversees the Fed:

The Federal Reserve was created by Congress through the Federal Reserve Act in 1913 and must work within the framework of overall economic policy established by the government. In particular:

· The Fed Board of Governors submits a detailed monetary policy report to Congress twice a year.

· The seven members of the Fed Board of Governors are appointed by the U.S. President and confirmed by the Senate. Same for the Fed Chairperson.

· The GAO, a nonpartisan agency that works for Congress, conducts audits and reviews of the Fed's activities.

· While the Fed is not funded by congressional appropriations, its financial statements are audited annually by an outside auditor retained by the Office of Inspector General (OIG).

· There is no government entity that can challenge the Fed’s monetary policy even though the President and Congress may and have tried to influence it.

How Will the Fed Respond to Oil and Mineral Shocks?

From a macro economic standpoint, the key issue remains how the Fed interprets inflation drivers. Currently, oil prices have risen steeply, and critical minerals are in short supply due to Iran closing the Strait of Hormuz along with the U.S. blockade of the Strait. That prevents oil and several critical materials (e.g. sulfur, helium, aluminum, graphite feed stocks, iron oil & steel pellets, bromine) to get to world markets.

This is perceived to be inflationary, even though it was not due to the Powell led Fed increasing the money supply which has recently been increasing rapidly (see M2 Chart below). The current uptick in oil and gas prices has revived a debate over whether such moves represent transitory shocks or persistent inflationary pressures.

Source: Board of Governors of the Federal Reserve System (US) via FRED

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Historical precedent suggests the Fed can look through commodity-driven inflation under certain conditions. For example, in the first half of 2008, crude oil prices rose from approximately $96 to $147 per barrel, yet the Bernanke led Fed cut rates aggressively, prioritizing to combat financial system stress and housing market deterioration (“the mortgage meltdown”) over headline inflation at that time. Here are the Fed Funds rate changes in 2008:

Dec 2007= 4.25%, Jan 22, 2008=3.5%, (75 bps was the largest cut in 25 years), Jan 30=3.0%, Mar 18=2.25%, April 30=2.0% Oct 8=1.5%, Nov 29 =1%, Dec 16=0.25% (another 75-bps cut).

àNotice that in January 2008, the Fed cut rates TWICE within eight days!

Those rate cuts did not lead to inflation as the economy was deteriorating fast and in a deflationary financial crisis, culminating with the bankruptcy of Lehman Brothers in September 2008 and the credit market freeze that immediately followed.

The “great recession” bottomed in June 2009. The stock market bottomed in March 2009 with the YoY Consumer Price Index for All Urban Consumers (CPI-U or "headline" inflation rate) at -0.4% that month. It was the first 12-month decline in the CPI-U since August 1955!

In contrast, the current Fed seems to have greater sensitivity to inflation persistence. At the April 29, 2026, FOMC meeting, dissent focused on forward guidance, with resistance to signaling premature easing—reinforcing the Fed’s emphasis on maintaining inflation credibility. Three of the four Fed governors dissented on “no rate cuts,” because they objected to language that even “suggested” a future cut in rates.

àThat shows how totally subjective the Fed can be!

Market Implications of Fed Policy Continuity:

The current divergence between geopolitical supply-side shocks and domestic monetary policy suggests a complex "stagflationary" risk profile. Assuming Fed policy continuity, there are several implications for financial and commodity markets:

· Interest Rates and the yield curve: a “higher-for-longer” bias should anchor the front end while limiting steepening. Any shift toward easing will likely require clear deterioration in labor or credit conditions.

· Equities: policy stability reduces tail risk but caps P/E multiple expansion which has driven stock prices higher for many years now. Equity upside remains tied to earnings resilience rather than valuation re-rating.

· Commodities: If the Fed continues to look through supply-driven price shocks, commodity volatility may not translate into tighter monetary policy. Without raising rates to curb demand, higher commodity prices often follow and persist.

· FX (U.S. Dollar): Fed policy discipline relative to other central banks should provide underlying support for the U.S. dollar, particularly if U.S. real rates remain elevated.

Victor’s Conclusions:

1. The FED, depending mostly on politics, does whatever it wishes to serve its masters and the political party it favors. I believe that the FED can make up “ANY REASON” to do what it wishes. That primarily depends on its political desires which are kept “close to the vest.”

2. The likely new Fed chair Kevin Warsh will have his work cut out for him after May 15^th when he joins the Fed as the Straight will surely not be open, free and clear at that time.

3. Tongue in cheek: If oil prices continue rising due to the Strait of Hormuz being closed, then why doesn’t the Fed temporarily raise the Funds rates to 10%? That would drive the oil price down without a shot being fired (no boots on the ground). Yes, that is absurd, but so are price increase due to a shortage of oil and minerals. Money supply is growing at 4.04% a year, while the May 1^st Truflation CPI rate is 1.83% per YoY vs BLS reported 3.3% YoY.

4. Finally, the rare and extreme stock market rally is incredibly confounding. The NASDAQ 100 was +15.33% in 18 days (February 27^th to March 17^th), while crude oil was + 42.82% over the same time period.

The convoluted conclusion is that the greatest oil shock in history has been incredibly bullish for stocks, with both the NASDAQ and S&P 500 closing at new all-time highs on Friday, May 1^st???

End Quote:

“The powers of financial capitalism had a far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be

controlled in a – ‘feudalist fashion’- by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences.”

By Carroll Quigley (November 9, 1910 – January 3, 1977) - an American

historian and theorist of the evolution of civilizations.

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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