A University of California-Berkeley research team led by Professor Annette Vissing-Jorgensen recently discovered some evidence that indicates the United States Federal Reserve regularly leaks information to certain media outlets and investors that in turn leads to a spike in stock returns.
In the study, Vissing-Jorgensen’s team discovered a bi-weekly pattern of unusually high return rates that coincidentally occurred after every meeting of the Federal Open Market Committee (FOMC) and during the weeks of closed board meetings of the Board of Governors of the Federal Reserve System. According to the study, these surges in stock prices suggest that information leaked from these supposedly closed-door meetings drives the pattern.
The conclusion: the leaked information has positive effects on the market.
As reported in the Daily Californian newspaper, Vissing-Jorgensen, assistant professor Adair Morse and Duke University assistant professor Anna Cieslak stated that the Fed uses “informal communication channels” in even-numbered weeks following the FOMC meetings. The leaks may appear in newspapers such as the Wall Street Journal - but are published before the board meeting minutes are released publicly. The leaks relay valuable information about the meetings.
The researchers claim that by comparing the content of such newspaper articles with the subsequently released minutes of the board meetings shows that the Fed must make regular leaks. The team also points to financial investors’ private advice containing information discussed only in the FOMC meetings.
The researchers conclude that the Fed leaks information so as to “steer market expectations.”
The team stated that, “We need to understand better which type of Fed news drives the stock market behavior and earns the premium.”
The researchers began collecting data in 2012 in order to establish the Fed’s communication processes with both the public and investors.
They noted that, “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.”
Obviously, the findings bring up many questions, including ones regarding the most effective way for the Fed to communicate with the public. The team also notes that their study raises controversies because it alleges that the Fed knowingly leaks market information.
The researchers stated that, “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.”