The Federal Reserve said on Monday that the Justice Department was conducting a criminal investigation into the disclosure of confidential information in 2012 about a crucial meeting of the Fed committee that sets monetary policy.
The Fed acknowledged the investigation in a letter to House Republicans who are pressing for information about the leak and the Fed's internal inquiry at the time…
Information about the Fed's plans is valuable to investors, particularly any glimmer of insight that is not available to the broader market. The Fed accordingly imposes tight limits on the disclosure of such information outside its public statements, and some past leaks have also been the subjects of criminal investigations. – New York Times, May 4, 2015
Once again, NYT misses the point. Yes, Federal Reserve leaks are bad. Authorities should identify the leakers and deal with them. But here is the bigger question:
Why is Federal Reserve information so valuable?
Fed officials from Janet Yellen on down maintain that the Fed does not try to influence financial markets. That may be literally true, but the Fed does influence financial markets. This is self-evidently true from the fact that its deliberations are so secret.
In other words, if the Fed were really the benign liquidity-provider it claims to be, it wouldn't have to keep any secrets. Knowing its plans would not give anyone an advantage.
Since the Fed does have secrets, we can fairly presume it has something to hide. What is it?
In the case at hand, a research firm called Medley Global Advisors obtained details about the Fed's "quantitative easing" program. Like its predecessors, QE3 involved the Fed purchasing mass quantities of U.S. Treasury securities and mortgage-backed bonds on the open market.
The mass quantities truly were massive: $40 billion per month. The Treasury and mortgage bond markets are both huge, but the Fed's buying was enough to make a splash. A trader who knew where the next splash would occur could have made a tidy profit.
Is that what happened? We don't know. Medley Global is a subsidiary of the U.K.'s Financial Times newspaper. It sells information to private institutional subscribers. Who bought this specific information is unclear, but they no doubt paid a tidy sum.
The Fed can add all the security measures in the world and still not solve the problem. As Internet visionaries like to say, "Information wants to be free." If people want to buy it badly enough, the price will go high enough to overcome whatever walls the Fed may build around it.
The only way to keep market-moving information from leaking out of the Fed is to get the Fed out of the market moving business. No such thing can happen unless the Fed and its Capitol Hill enablers admit to themselves that the institution is inherently anti-market.
We might also wonder how many leaks go undetected. They are impossible to stop. A clever Fed governor doesn't need to go in a dark alley to tip off his co-conspirators. He can simply wear a green tie instead of a red one when he gives a speech, or use some other pre-arranged signal.
Preposterous? Maybe, but can anyone be confident such trickery isn't already happening? Of course not. It could have been routine for decades. This is why the Fed is dangerous and undemocratic. The only way to keep its secrets safe is to make sure it has none.