Fed Leaks Benefit Certain Investors

A recent study by two Berkeley University economists not only confirms that the Federal Reserve routinely "leaks" confidential information but that the recipients of those leaks may be on the ground floor of a great investment strategy:

Vissing-Jorgensen and her colleagues found that the stock market delivers better returns versus Treasury bills the second, fourth, and sixth weeks after each of the Fed's eight policy-setting meetings during a given year. During odd weeks, returns are poor, they found.

An investor could simply exit the stock market during odd-numbered weeks, and return during even-numbered ones, and make much more than an investor who stayed in the stock market the whole time, they suggested.

The weeks that have excess stock-market returns are generally the same in which there are closed Fed Board meetings, and increased volatility in short-term interest-rate futures contracts suggests that it is information on monetary policy from those meetings that is driving the pattern.

"The most important and likely channel through which information gets from the Fed to asset markets is informal communication with the media or private financial institutions," Vissing-Jorgensen wrote.

The authors of the study claim that the Fed's leak serves a useful purpose:

According to Vissing-Jorgensen, however, such leaks - or informal communications, as they are termed in the academic literature - occur frequently and are not necessarily bad. Fed officials may want to test market reaction to a particular policy move ahead of time, and leaks are one way to do so.

European Central Bank Board member Benoit Coeure, reacting to the research on Saturday, said central bankers do sometimes need to send up covert trial balloons on policy, or check with investors afterward on how a policy move panned out. Still, he said, central bankers should try to be as transparent as possible.

Leaking confidential information that could effect the values of US Treasuries is called "a useful way to test reaction to policy" when the Fed does it, but when a private individual does it, it is called insider trading.

If you agree that the Fed should be as transparent as possible with all Americans, not just a select few, and if you would like the chance to win an Ar-15, then please support our Audit the Fed Ar-15 giveaway. Remember all donations made before midnight Wednesday will be matched!


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