UC Berkeley professor, research team find evidence of information leaks by Fed

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UC Berkeley professor Annette Vissing-Jorgensen and her research team have discovered evidence that the Federal Reserve regularly leaks information to certain investors and media outlets, leading to a spike in stock returns.

In the study, Vissing-Jorgensen and her team discovered a biweekly pattern of high return rates that occurred after each meeting of the Federal Open Market Committee and on the weeks of closed Board of Governors of the Federal Reserve System board meetings. According to the study, this suggests that information leaked from these closed meetings is what drives the pattern, which the researchers have concluded could have positive effects on the market.

In an email, the three authors of the study — Vissing-Jorgensen, Duke University assistant professor Anna Cieslak and UC Berkeley assistant professor Adair Morse —  said the Fed uses “informal communication channels” on even-numbered weeks after FOMC meetings. These leaks can appear in newspapers such as the Wall Street Journal before board meeting minutes are publicly released and relay valuable information about Fed meetings.

The researchers claim evidence of regular leaks from the Fed by comparing the content of the newspaper articles with subsequently released board meeting minutes and pointing to private advice received by financial investors that contains information discussed in FOMC meetings.

In their study, the researchers said the Fed leaks information in order to “steer market expectations,” which allows it to enact continuous, incremental policy changes. The researchers additionally said in the email that the Fed can release information about either the economy or policy preferences of various FOMC members.

“We need to understand better which type of Fed news drives the stock market behavior and earns the premium,” the researchers said in an email.

According to the researchers, they began collecting data in late 2012 in an attempt to establish the Fed’s communication processes with both investors and the public. In an attempt to demonstrate that the biweekly spikes did not correlate with other economic news, they compared their data to Bloomberg news releases on economic data such as GDP growth and consumer confidence. The study found that the spikes in investor return rates did not match up with the releases.

“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,” the researchers said in an email.

The findings have brought up several questions, including those about the most effective way for the Fed to communicate with the public, according to the researchers. They also said their study’s findings are controversial because they argue that the Fed knowingly leaks information.

“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 said in an email.

The researchers argued that sanctioned, clear public communication should be a substitute for informal communication, saying it would allow market expectations to be steered publicly and allow the public to request feedback on potential policy moves.

Contact Anderson Lanham at [email protected].

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  • Mark Talmont

    No! The Fed acts in a manipulative fashion to suit a rarified elite?!

    The boards of governors of the privately owned Federal Reserve Banks constitute institutionalized “insider trading” similar to the old-days system of stock market “specialists” back when people stood at trading stations yelling orders back and forth. (interesting note is that at the London exchange on the first day of electronic trading back in the 90s nobody showed up on the trading floor at all, meanwhile the Chicago commodities pits remain an animalistic (and open to fraud) physical mosh to this day.

    The only thing worse is the “too big to fail” bank managements themselves. See if you ever read or heard about this on the Channel One Media:


    Close observers of these issues know that Hilary Clinton refuses to even acknowledge the risks of leaving this situation in place. None other than Liz Warren and John McCain are co-sponsoring a measure to in part undo the damage done by the demented repeal of Glass-Steagal Hilly’s hubby hustled through the congress.

  • ShadrachSmith

    The trading is too complex for legislators, soon it will be too complex for any humans to understand. The rise of the machines doing the trading will bring back technical analysis, because nobody understands what the programs are doing about value any more.

  • Triad of Thebes

    Surprise! *snark