“gleaning clues about the thinking of Fed officials during private talks can be … valuable to investors making bets on the direction of the economy … making snippets of information as subtle as head nods and body language extremely valuable”
The Wall Street Journal just broke this story about how big investors can gain pre-public information about Fed policies. This is a wink-wink-nudge-nudge approach to the Fed’s communications of policy. They aren’t supposed to reveal any information about non-public policy decisions. But as the article reveals, investors who live and die on what the Fed may do can clearly interpret this subtle discourse for their benefit.
The article discloses this kind of advantage these people have:
Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist.
The news pointed to a boom in long-term bonds.
It was a good call. Over the next five weeks, prices on 10-year Treasury bonds soared, offering double-digit returns in an otherwise dismal year.
By the time the Fed announced its $400 billion Operation Twist on Sept. 21, the window for quick profits had all but slammed shut.
Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn’t comment for this article.
The access is part of a push by hedge funds and other traders to get more information about the inner workings of government. Developments in Washington have become more important after the financial crisis in 2008 spawned new regulations and a stronger hand by lawmakers in businesses.
The Fed has discussions with major investment companies and bankers all the time. They deny there is any favoritism:
“We take great care to frame subjects and questions in a neutral manner that does not provide any insight into our own thinking and we are careful to keep in mind that their comments may sometimes reflect their firms’ own interests,”said [New York Federal Reserve Bank President William Dudley ] in a statement.
The meetings are “particularly important during periods of market stress,” he said, and help him get a “broad range of perspectives on the markets and the outlook for the economy.”
Gosh, who wouldn’t like access to the Fed at that level.
It will be fun watching Chairman Bernanke squirm about this as he gets grilled by Ron Paul at the next Fed Oversight Committee hearing.