Back in 2015, we detailed a study by researchers at Duke University and the University of California at Berkeley pointing to quantitative evidence that The Fed consistently leaks non-public information about its meetings.
The study, first reported by The Daily Californian, considers historical patterns in stock prices relative to the distribution of non-public Fed information. “The Fed uses ‘informal communication channels’ on even-numbered weeks after FOMC meetings,” the report said, pointing to leaks making it into media stories such as the Wall Street Journal as well as showing up in private financial advice.
To support their claims, researchers point to private advice received by financial investors and news reports that contained non-public information discussed in FOMC meetings. “The informal communication can steer market expectations by engaging with private forecasters and newsletters that influence market inference of current and future policy,” the report stated, citing the goal of managing market expectations. “Informal communication facilitates learning by the Fed from the financial sector about how the Fed’s assessment of the economy compares to that of the financial sector and about how markets are likely to react to a particular policy decision.”
At the time, the report dovetailed with a recent insider trading investigation of the Fed, which was mentioned in the report. The report authors pointed to a lack of concern regarding being investigated or prosecuted for the wide-spread if brazen leaks:
We provide a list of Fed leaks of the FOMC outcome (or key determinants thereof) or the FOMC minutes to private financial institutions, again being constrained in seeing only the leaks that emerge in the public domain. The most well-known example is the October 3, 2012 leak to Medley Global Advisors (MGA), a policy intelligence firm. It is clear from that document that Regina Schleiger, the MGA analyst, had a copy of the FOMC minutes from the September 2012 FOMC meeting, which were due to be released the day after her article. In addition, she provides a step-by-step account of the policy debate among FOMC members ahead of the September 2012 FOMC meeting, information that goes beyond the content of the minutes.
Two things are notable about this example beyond the leak itself. First, it is informative that the analyst wrote the newsletter without a concern for the legality of extracting and conveying inside information to those who could trade ahead of the minute release announcement. One possible interpretation of this is that leaks are commonplace and not prosecuted. Second, the subsequent investigations of the MGA leak offers evidence of the systematic nature of informal communication between the Fed and the financial sector.
We noted at the time that in some respects, the lack of concern regarding legal consequences for its actions reflects a growing trend after 2008 where elite financial players didn’t believe their transgressions would be investigated much less prosecuted.
Three years later and still no prosecutions… and now a new report by University of Chicago Booth School of Business Ph.D. candidate David Finer, has exposed The Fed’s clear manipulation and rigging of financial markets through ‘leaked’ information.
As The Wall Street Journal reports, Finer found a jump in New York City taxi cab activity between the Federal Reserve Bank of New York and major Wall Street banks around the time of central bank policy meetings, and the study’s author says the findings suggest an increase in informal communications between Fed employees and individuals in the private sector could be occurring.
Mr. Finer used government-provided GPS coordinates, vehicle information and other travel data to track taxi traffic between the addresses of the New York Fed and major banks. His research pointed to increased traffic between the destinations around lunch and late evening hours, which suggested informal meetings were taking place.
“The paper does not say anything illegal is happening,” Mr. Finer said in an interview. But “the pattern of interactions suggest these meetings are happening, and there’s the potential for information to be shared” between Fed employees and those in the private sector at these types of gatherings, he said.
“Their geography, timing and passenger counts are consistent with an increase in planned meetings causally linked to the incidence of monetary-policy activities,” he wrote. “I find highly statistically significant evidence of increases in meetings at the New York Fed late at night and in off-site meetings during typical lunch hours,” which is suggestive of “informal or discreet communication.”
The time surrounding the signing of Dodd-Frank saw a shocking rise in bilateral commercial-bank, Fed travel…
It seems 2012 was a big year for Fed leaks…
Of course, a spokesman for the New York Fed said the paper’s claims were fundamentally flawed.
“Many of the working paper’s inferences are flawed and misleading,” the bank spokesman said. “It is simply not credible to imply that an increase of a few taxi rides by unknown passengers between densely populated areas of the city—business, transportation and hospitality hubs—increased the risk of inappropriate communication,” he said, noting the Fed has strong policies governing how its staff interact with financial institutions.
As a reminder, just last year, then Richmond Fed President Jeffrey Lacker stepped down after revealing he had accidentally confirmed sensitive information about a Fed bond-buying program to a financial information firm and then failed to report the disclosure.