Embedded below is a clever study that provides support for a widely-held belief: that New York Fed officials are more that a bit too chummy with their contacts at big banks.
The author, Chicago Booth PhD candidate David Andrew Fine, mines New York City taxi ride data to see if it lends support to the idea that Fed officials are deliberately or accidentally giving out useful trading data via being receptive to banker desires to hob-nob with them around critical times: when the blackout on FOMC data-sharing ends, and around FOMC meeting (when information is supposed to be kept secret).
The reason for the interest?
Cieślak, Morse and Vissing-Jørgensen (2016) present evidence that the equity premium [of large banks] has largely been earned in the weeks of Federal Reserve monetary-policy meetings and, drawing on a corpus of anecdotes, hypothesise that uno cial Federal Reserve communication around these meetings is responsible.
Here are the key findings, per a University of Chicago News summary:
The data yield evidence that rides from commercial banks directly to the New York Fed and offsite meetings involving insiders of the New York Fed and commercial banks increased around the time of FOMC meetings.
The data show a striking increase in rides from the commercial banks to the New York Fed almost immediately after the midnight lifting of the communications blackout. Tight restrictions on Federal Reserve staff communications are in force until midnight the day after an FOMC announcement, and rides to the New York Fed are elevated between 1 and 4 a.m. thereafter. The timing and location suggest that information pertinent to the conduct of monetary policy is being shared. The Fed might, for example, seek information on bond market conditions or provide clarification about the announcement.
Analysis of nearly coincidental drop-offs suggests that offsite lunchtime meetings between New York Fed insiders and commercial bankers increase around FOMC announcements. Coincidences are elevated from approximately the day before the announcement through a week afterward. The increase might partially reflect pent-up demand for meetings due to the blackout.
Both the post-blackout direct rides and lunchtime coincidental drop-offs were particularly elevated around monetary policy meetings in 2012, the year of the announcement of the third round of quantitative easing known as QE3.
The entire study is worth reading, since it also recaps other information that shows how loose-lipped the Fed is, like the Wall Street Journal reporting on FOMC meeting discussions before the blackout period is over.
18WhatInsightsDoTaxiRidesOfferintoFederalReserveLeakage
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Sooo, this is illegal?
Talking after the midnight news embargo is OK but you can see how it gives the big boys an advantage.
The talking around the time of the FOMC is not. The study points out these may not be intentional leaks, the traders may infer something from tone of voice or mood. But the bankers are clearly soliciting info at this time, and it’s poor form for anyone at the Fed who knows anything re what the FOMC is doing to meet with anyone during the embargo period. The bankers are clearly fishing for hints. Why enable that? The meetings have bad optics and may amount to the Fed trying to manage market reactions while having plausible deniability.
Im guessing the once a month Dudley Hatzius dinner at the Spotted Pig wasnt included in the data set
I have a feeling that this guy shut down his career options at both the Fed and the big banks.
That was also the first thought I had on reading this post.
Eh, maybe he just increased his market value. The banks will definitely see the benefit in co-opting an outspoken critic. It is the essence of their capture activities.
This is a lovely piece of analysis. Elegant in conception even. Instead of chasing models that could never apply in the real world, this guy appears to be looking direct at human nature and correlating different facts to support a theory of how things work in the real world. I hope that this guy is eventually awarded a Masters – with Honours.
Agree. The reasons for physical meetings vs. electronic communications are fairly self evident.
Conceptually similar to the “Pulse of Commerce Index” (PCI) developed at UCLA that was inexplicably discontinued in June 2012. That real time index captured the number of gallons of diesel fuel purchased by truck operators on U.S. interstate highways, at major ports, in major cities, and at border crossings during a given period. That data provided immediate evidence about the status and direction of the U.S. economy and could be compared to subsequent official GDP numbers.
What? They’re not doing the rideshare thing with Uber? How quaint!
But then Uber would have a video! Ah, imagine the drama. Somebody could do a movie on this kind of thing: “the tone of voice, the mood” expressed to traders…
AFAIK, Uber doesn’t have any limos.
ok, so big banks and the Fed talk – is that really a big deal? Little guy gets upset when his stocks go down but a genius when they’re up. Little guy wants the benefits of big guys’ infrastructure with none of the costs – unlikely to happen
More interesting question would be to correlate taxis from big bank HQs, at various competing firms, and see where they all end up, eg, if Bank A goes to dinner at 31st & Lex as does Bank B and Bank C etc, on Wednesday at 7pm, I think thats a much bigger deal and more interesting to know
Technically all this proves is that the traders think they can get information this way. They may or may not be right. I agree that just the possibility should be enough for the Fed to shut this down.