Researchers at Duke University and the University of California at Berkeley point to quantitative evidence that The Fed consistently leaks non-public information about its meetings, driving an investment pattern that has led to market gains.
Pattern of Fed leaks and market gains established
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.”
“The data collection exercise was extensive, but it served our goal to understand how the Fed processes information internally and how it communicates with the public and the financial markets in particular,” researchers Vissing-Jorgensen, Duke University assistant professor, Anna Cieslak and UC Berkeley assistant professor Adair Morse were quoted as saying. The report specifically points to leaks by a variety of Fed officials, including then New York Fed Vice Chairman Timothy Geithner leading information about the Fed’s plans regarding the discount facility to then Bank of America CEO Ken Lewis.
Fed insider trading investigation is the tip of a regular system of leaks where little concern for being prosecuted exists, report claims
The report dovetails a recent insider trading investigation of the Fed, which is 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.
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.
Such a breakdown of deterrence can have negative effects on society and may be unnecessary, the report observes. “While some informal communication is probably necessary in order for the Fed to learn from market participants, this is a fine balance since the Fed may be giving away very valuable information to particular investors in the private sector,” the researchers were quoted as saying, arguing that sanctioned, clear public communication is the appropriate substitute for informal behind the scenes communication to select insiders.
Read the full study below.