December 4th, 2014
by Jake Bernstein, ProPublica.org
Update, Dec. 1, 5:55 p.m.: The Federal Reserve Board declined to respond to detailed questions about this article. The Inspector General also declined to comment. Former Fed Chairman Ben Bernanke referred all questions to the Federal Reserve. Medley Global Advisors did not respond to requests for comment.
The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst's private newsletter.
The leak occurred the day before the scheduled public release of meeting minutes that shed new light on the Fed's decision to embark on a third round of bond buying to boost the economy, ProPublica has learned.
The newsletter revealed what the minutes would say the next day as well as fresh details about the Fed's internal plans and deliberations - information that could have provided traders with an edge.
Leaks from inside the Fed are considered a serious matter. In the past, they have prompted Congressional concern and triggered the involvement of federal law enforcement. In this instance, then Fed Chairman Ben Bernanke instructed the central bank's general counsel to look into the matter.
The Federal Reserve has faced criticism in recent years for its information security practices, with some in Congress questioning whether it operates under sufficient oversight.
The October 2012 leak involved deliberations of the Federal Open Markets Committee, which holds eight regularly scheduled meetings per year to set policies that control inflation and keep the economy growing. Since the 2008 economic crisis, it has involved itself more deeply in financial markets.
Minutes of the committee's meetings are released promptly at 2 p.m. three weeks after it meets. Fed watchers eagerly await the event and parse every word for clues on how financial markets will move.
The Fed tightly guards nonpublic information about deliberations by the committee and the select staffers who are privy to them, about five dozen people in all. Doing so is critical to "reinforce the public's confidence in the transparency and integrity of the monetary process," the Fed's policy on external communications says.
The policy also states that Fed staffers "will refrain from disseminating information outside the Federal Reserve ... that might allow an individual firm, or organization to profit financially."
The newsletter containing the leaked material came from an economic policy intelligence firm called Medley Global Advisors whose clients include hedge funds, institutional investors and asset managers. On Oct. 3, 2012, Regina Schleiger, an analyst with the firm, sent clients a "special report" titled "Fed: December Bound."
The report focused on the Sept. 12-13 open market committee meeting, where the panel had approved what's called "QE3," a new program of large-scale purchases of mortgage-backed and Treasury securities.
Typically, the Fed chairman holds a news conference following the meetings to help explain the committee's actions. But when Bernanke did this on Sept. 13, he did not reveal the depth of disagreement within the committee about how effective the bond-buying program would be and whether it was worth the cost.
Schleiger wrote, however, that the minutes due out the next day would reveal "intense debate between Federal Open Market Committee participants."
Schleiger also revealed that the Fed would likely continue buying longer-term Treasury bonds beyond December. As part of a program dubbed Operation Twist, the Fed had been selling short-term Treasuries to buy longer-term ones.
Schleiger wrote that the committee would likely continue buying long-term bonds even after it sold all the shorter-term Treasuries. This information was not contained in the minutes and proved to be accurate.
Her newsletter also explained in uncommon detail both how Fed staff constructed the minutes and various policy options that were recommended and the thinking of the leadership - Bernanke and vice chairs Janet Yellen and Bill Dudley.
"It's not unusual for board staff to pull all-nighters working on the final draft of the policy recommendations, once these has [sic] been commented on," Schleiger wrote. "This one took until after midnight."
Prices for benchmark 10-year Treasury notes fell the day after the minutes were released, with the yield climbing to 1.72 percent, up from 1.62 percent the day before the meeting.
The newsletter came on the heels of a Wall Street Journal article published Sept. 28 that also gave insight into some of the Fed's thinking. The Journal article, which extolled Bernanke's ability as a consensus builder, did not have as much detail or information as Schleiger's newsletter.
Soon after becoming aware of Schleiger's newsletter, Bernanke expressed concern about the leaks to his fellow FOMC committee members. Bernanke told them that Scott Alvarez, the Fed's general counsel and William English, the committee's secretary, would be conducting an internal inquiry.
The FOMC consists of seven members of the Board of Governors of the Federal Reserve System and five representatives from individual regional reserve banks. Although the president of the New York Fed is a permanent member of the FOMC, the reserve bank presidents rotate on and off the committee.
By November, Alvarez and English sent a questionnaire to committee staffers asking recipients if they had communicated with Schleiger or The Wall Street Journal. Their inquiry also included some staff interviews.
In January 2011, the Fed had passed an amendment to its "Program for Security of FOMC Information" to deal with leaks. The move came after criticism in the news media and elsewhere that former Fed officials had unusual access to the institution and were using it to sell information to clients.
The new protocol requires the FOMC secretary and the general counsel to perform a preliminary review if a leak is suspected. Results are to be reported to the Fed chairman. The general counsel then decides if the matter warrants further investigation by the Fed's inspector general.
Outside agencies have investigated past Fed monetary leaks.
Ahead of an FOMC meeting in 1996, a Reuters reporter quoted an unnamed senior Fed official in a story that identified how many of the regional Fed presidents wanted to raise a key interest rate.
After the story appeared, bond prices fell and interest rates increased. Alan Greenspan, then the Fed chairman, asked for FBI assistance to ferret out the leaker and determine whether a crime had been committed.
In April 2013, a Fed congressional liaison inadvertently released a full draft of the FOMC minutes. They went out a day early to an email list of 154 people that included Congressional staff, trade groups and banks.
The release forced the Fed to issue the minutes early the next morning. The Fed also contacted the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission to see if there was trading based on the released information.
The Fed's inspector general also was asked to review procedures involved.
Related stories: Read more of reporter Jake Bernstein's coverage of the Federal Reserve.