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, reports the University newspaper, The Daily Californian.
In the study, according to the Californian, 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.
“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.