Fed Determined to Tighten Phone Secrecy Safeguards

Keeping touchy policy matters hush-hush is supposed to be second nature to Federal Reserve officials.

But it has taken a little nudging from an in-house watchdog to remind the central bankers that the walls have ears.

Fed officials haven't been using 74 special voice-encrypting telephones reserved for sensitive conversations, the central bank's inspector general, Brent Bowen, said in a recent report.

As a result Mr. Bowen told reporters, the central bank is more vulnerable than it should be to interception of secret information.

The seven Fed governors, the presidents of the 12 regional reserve banks, and other officials involved in monetary policy are supposed to use the security phones whenever they think a sensitive issue could come up in conversation.

One problem is that the phones are hard to operate-even for a bunch of PhDs.

There are also annoying transmission lags while conversations are scrambled and encrypted. And the phones can't be used for conference calls.

"It's hassle." Mr. Bowen told reporters.

The special phone system, known as STU III, encrypts sensitive conversations, "making them unintelligible to an intruder," according to Mr. Bowen.

The Fed set up the system in 1977 out of concern that sensitive calls could be intercepted "by unfriendly foreign governments or by criminal elements attempting to exploit the financial markets," the report said.

Twenty STU III phones are at the Federal Reserve Board in Washington; the 54 others are in regional reserve banks and branches. They run on dedicated circuits, but are connected to public phone lines through U.S. Sprint Communications Co., the long-distance carrier.

A Closet Left Unlocked

Once Fed officials start using the phones, security needs to be tightened, according to Mr. Bowen.

His audit team found that the wiring closets housing the high-tech phone equipment at the Fed lacked adequate protection. The locks were "not very secure," and one closet wasn't locked at all.

Fed administrators who received the report were chastened. In a memo included in Mr. Bowen's report, they pledged to step up security awareness and train officials in using the phones.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.