Inflation-Hawk Lacker Was the Fed's Fall Guy
One of the great Federal Reserve scandals in recent history seemed to resolve itself last week as Jeffrey Lacker of the Richmond Fed resigned for his role in the Medley Leak. But as Pedro Nicolaci da Costa, (perhaps the best reporter on this story) points out, the finely scripted statement from Lacker shows that he was not Medley’s original source for the market-moving information.
Lacker’s statement reads:
During that October 2, 2012 discussion, the Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. 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.
When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.
As da Costa points out:
What Lacker admitted to was unwittingly confirming key information about deliberations on whether and when the Fed should purchase large quantities of government and mortgage bonds to keep long-term interest rates down.
That means "the Analyst" at Medley actually obtained the market-moving details about the Fed's decision-making from someone else.
The identity of the initial source remains a mystery.
While laws against insider trading should be abolished, there is an obvious difference between dealing with non-public information about private companies and central bank officials tipping off a select group with valuable information. In spite of such behavior undermining institutional credibility, the Fed has seemed disinterested in properly investigating it. They did conduct an internal investigation which largely cleared itself of any wrongdoing, but the the FBI and Congressional oversight disagreed with those findings. In fact, this decision to handle the matter internally, rather than working with outside organizations, has raised more questions than answers.
Whether the original source of the Medley leak is found, the entire episode should plainly illustrate the need for greater oversight and transparency at the Federal Reserve.
On Monday, Yellen took the opportunity during a public event at the Ford School of Business to reiterate her position to Congressional attempts to increase Fed transparency, her own actions during the Medley scandal validate the need for changes to be made. The Fed’s utter inability to conduct a credible investigation into blatant mishandling of public information demonstrates that mythical “Fed independence” shouldn’t be enough to prevent public transparency over the Fed’s monetary policy. Especially, as Jonathan Newman noted last week, considering the truly radical nature of the Fed's post-crisis policy.
It’s also worth pointing out that Lacker’s resignation, correct or not, is a significant loss for those skeptical of the Fed’s post-crisis action. Lacker was perhaps the strongest inflation hawk among the members of the FOMC, and has claimed that if he had full control of the Fed he would have never attempted Quantitative Easing in the first place. He has also publicly questioned whether QE has made unemployment worse.
Lacker’s replacement will not be decided by President Trump, but does represent yet another open seat in the FOMC. Who ends up filling these seats will be very important as the Fed seeks to normalize interest rates and unwind its balance sheet. Hopefully Lacker’s successor will share his sensibilities while Trump’s own Fed appointees resemble his campaign rhetoric more than his emerging tax plan does.
Is the Demand for T-bills Driving Treasury Deposits at the Fed?
Is the Size of the Fed's Balance Sheet More Important than the Target Rate?
In a recent interview on CNBC's Squawk Box, Neel Kashkari explained his dissenting position on the March rate hike. His position was that there is not yet enough inflation. In fact, he thinks that the Fed's 2% inflation target shouldn't be seen as a hard ceiling. He even stated that predictions of coming inflation worries are baseless:
For the last five or six years, the Federal Reserve keeps predicting inflation is around the corner. And those predictions end up being wrong.
Of course, with the massive expansion of the Fed's balance sheet going into areas like the stock, bond, and housing markets, the Fed's measures of inflation don't even reveal what is happening to the economy's capital structure. Distortions in the capital markets are far more serious than than the PCE represents. It's frustrating enough that the central bankers are trying to increase the cost of living. But then we are reminded that they don't even know how credit expansion impacts the boom and bust cycle.
What is interesting though, is Kashkari's opinion that addressing the gigantic balance sheet should come prior to any further rate hikes:
As we move forward, we allow the balance sheet to start running off. Then we can return to fed funds rate hikes when the data call for it. The balance sheet should be the next move.
This preference of balance sheet before rate hikes is also unique among the FOMC members — everyone else wants the balance sheet scaled back to follow additional rate hikes. It will be interesting to see whether Kashkari's opinion on this gains any ground among the other members. Perhaps we will get a further indication as we approach the May and June Fed meetings.