Fed leak? Why should you care?

Richmond Federal Reserve President Jeffrey Lacker resigned Tuesday after acknowledging that he may have provided sensitive information to a research firm in October 2012.

The leak has been the subject of long-standing investigations by the Justice Department, federal regulators and a House committee.

The Federal Reserve System carries out the nation’s monetary policy by setting interest rates, and it takes other steps to stimulate the economy and control inflation. The system contains the Fed's board of governors and staff in Washington and at 12 regional banks, including Richmond.

Who is Jeffrey Lacker?

Lacker has headed the Richmond Fed since 2004 and had planned to retire In October. He’s a member of the Fed’s policymaking committee, which meets every month amd makes decisions about whether to raise or lower the benchmark interest rate, affecting rates across the economy.

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What did he do?

On Oct. 2, 2012, Lacker spoke to an analyst at Medley Global Advisors, an economic and political intelligence firm. In his statement, Lacker said the analyst already had “an important non-public detail” about a Fed policy option. “Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued,” Lacker said.

After the call ended, Lacker did not report to Fed officials that the analyst had confidential information, as required by the Fed. When Medley published its report the next day, Lacker realized the analyst could have taken his failure to decline comment “as confirmation of the information,” Lacker said.

On Oct. 3., Medley analyst Regina Schleiger wrote a note to clients saying the Fed was poised to vote at its December meeting to start buying another $45 billion in Treasury bonds to further juice economic growth. She also wrote that Fed officials discussed adding to its December statement an assurance not to raise interest rates until unemployment and inflation hit certain targets.

Why does it matter?

Federal Reserve leaders and staffers in possession of sensitive information are required to keep it confidential until it’s made public. If a trader obtained the information about the Fed's plans for interest rates before that time and traded on it, it could be considered insider trading. And it can undermine the integrity of the Federal Reserve System.

“The Medley investigation is all about central bankers giving preferential information … to a political intelligence fund that makes millions selling that special access,” says J.W. Verret, professor of banking law at George Mason University and former senior counsel for the House Committee on Financial Services, which investigated the leak.

Verret says “billions of dollars” could be traded on such information. “The central bank loses credibility to say the least,” he said.