WASHINGTON — Revelations about a 2012 leak of confidential information by a now-former regional Federal Reserve Bank president could further embolden Congress to restrict the central bank.

Richmond Federal Reserve Bank President Jeffrey Lacker abruptly resigned Tuesday after admitting that he had improperly confirmed a 2012 leak of confidential information related to expected Treasury purchasing activities by the Federal Open Market Committee.

That information, which was published by Medley Global Advisors, a economic analysis firm, was potentially valuable to market investors and sparked investigations by the Federal Reserve’s inspector general, the Department of Justice and the FBI. Lacker’s resignation letter admitted to tacitly confirming some details of those activities and not informing investigators that the Medley analyst was in possession of it.

Jeffrey Lacker, former president and chief executive officer of the Federal Reserve Bank of Richmond.
The resignation of Richmond Federal Reserve Bank President Jeffrey Lacker amid revelations that he had been the source of a 2012 monetary policy leak could embolden the central bank's critics to restrict its independence. Bloomberg News

But while Lacker’s immediate departure is the most significant initial effect of his revelations — he had announced in January that he would retire Oct. 1 — some analysts are saying that a secondary effect is to hasten and perhaps intensify calls for the Fed’s monetary policy-setting body to move to a more rules-based system than it now uses.

For decades, Fed officials and critics have sparred over whether the central bank should set its monetary policy according to some formula, a so-called rules-based system, versus allowing Fed officials flexibility to determine the best outcome, a deliberative policy.

Ken Thomas, former lecturer in finance at the University of Pennsylvania Wharton School of Business and President of Community Development Fund Advisors LLC, said that up until now the best example of the shortcomings of a deliberative monetary policy had been former Fed chairman Alan Greenspan’s push to keep rates low in the early 2000s — a policy that arguably intensified the housing bubble. But the kerfuffle surrounding the Medley leak may provide a newer and more visceral demonstration of the merits of a rules-based policy.

“I could not think of a better argument for a rules-based policy, and I’ve been following the Fed for nearly 50 years,” Thomas said. “This, to me, is going to be the new Exhibit A.”

Many congressional Republicans have been pushing for a rules-based monetary policy for some time; Rep. Andy Barr, R-Ky., said during a hearing on the subject in the House Financial Services Committee on March 16 that the Fed’s process for setting the federal funds rate has been haphazard, and that unpredictability hampers economic growth.

“The longer we go without a reliable strategy for monetary policy, the longer households and businesses will continue losing their direction in the thickest of economic fogs,” Barr said. “The Committee on Financial Services is dedicated to a set of [monetary policy] reforms that will blow away the lingering policy fog — reforms that will bring monetary policy back into the sunlight so that transparency and discipline can help all Americans finally get back on track.”

Not surprisingly, Democrats and the Fed itself have been wary to embrace any sweeping changes in the Fed’s monetary policy-setting process. During that same March hearing, Rep. Al Green, D-Texas, said the reforms that the committee majority has in mind are essentially a means of controlling the Federal Open Market Committee.

“That's the operative phrase: micromanage,” Green said. “Because that's what we are getting to. That's where we would be headed. That's the direction we'd be headed in.”

Norbert Michel, senior research fellow at the Heritage Foundation, said the issues around Lacker’s divulgence — intentional or otherwise — of confidential FOMC information justifies the move to a rules-based policy for two reasons. The first is that a rules-based policy would obviate the need for secrecy because the direction of monetary policy would be known to everyone. The second is that a rules-based policy precludes the kinds of exotic policies that the Fed was contemplating when Lacker disclosed them.

“At a high level, this is another piece of the puzzle in terms of why we don’t want to have the sort of discretion that gives us what we’ve got here — all these large-scale asset purchases, unconventional monetary policy and just doing whatever we want,” Michel said.

But others are not convinced the Lacker episode moves the needle very much in any direction. Marcus Stanley, policy director for Americans for Financial Reform, said the government handles confidential market-moving information all the time, across countless agencies. That the information leaked is unfortunate, he said, but as long as government-based information has value, people will attempt to acquire it.

“The fact that there are confidential things in government that if leaked early can make people money is just a fact of life across a lot of different agencies — it’s hardly unique to the Federal Reserve,” Stanley said. “I’m not sure this provides much of an argument either way.”

Justin Schardin, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, said the leak will probably be used be people who are already critical of the Fed and its operations to continue to criticize the central bank.

“I do think there will be some additional suspicion about how the Fed operates,” Schardin said. “You have a situation where the public didn’t know that a problem had been identified more than four years ago, but there’s no reason that the episode should specifically affect the independence of monetary policy.”

There are still lingering questions about how the Fed and other investigators responded to the leak, and how much Republicans’ criticism of the central bank resonates could depend on if there are more revelations to come.

Lacker appeared to indicate in his resignation letter that he had not told the FOMC about his disclosure but had told the FBI and the Justice Department when they contacted him in 2015. Members of the Richmond Fed’s board of directors said in a statement Tuesday that once they had “learned of the outcome of the government investigations, they took appropriate actions,” but did not specify that they forced Lacker to resign.

Fed Gov. Daniel Tarullo, who retired Wednesday, said during an interview on CNBC the morning of his last day that the fact that Lacker was held accountable for his carelessness once it was revealed should instill confidence in the public that safeguards are in place. But he also spoke somewhat vaguely about which authorities within the Fed system were holding Lacker accountable.

“What’s most important is that … the responsible parts of the Fed — whether it’s the Reserve bank board or the board itself — take action to show that those are important rules, and I think that is what has happened,” Tarullo said. “More than anything, it should be an important reminder to everyone on the FOMC that it’s important to be very aware of the rules and to be very careful, in my judgment at least, not to get too close to the rules.”

Some critics appear satisfied with this answer. Sen. Elizabeth Warren, D-Mass., and Rep. Elijah Cummings, D-Md. — who had sent a letter to the Fed in 2015 asking the agency for details into the investigation — said in a statement Tuesday that while they thought the investigation should have concluded sooner, “it is welcome news that the Fed has finally addressed it and is holding Lacker accountable.”

But others want details of the investigation and imply that the Board of Governors, the Richmond Fed board of directors or both are not being forthcoming with what they know about the leak. Jordan Haedtler, campaign manager for the public advocacy campaign Fed Up, said the fact that Lacker was reappointed to a five-year term at the Richmond Fed in 2016 raises the question of whether anyone on the Fed board or at the regional bank had any suspicions that Lacker might have been a source of the leak.

“What did the Richmond Fed and the Board of Governors know … and when did they know it?” Haedtler said in a statement. “The public deserves to understand what the Richmond Fed knew about Lacker’s involvement with the Medley leak, at what point they informed the Board of Governors, and how this factored in both the Richmond Fed and Board of Governors’ decision to appoint Lacker to a new term.”

There are also some who wonder if there's another source of the leak. Lacker said he may have inadvertently confirmed the leak, but his statement made it clear that he was not the source of the initial information. The identity of that source remains unknown.

Michael De Los Santos, deputy director of the local advocacy group Action NC, said the leak and the investigation should spur the Richmond Fed to “overhaul its process for selecting a new president,” because “our communities can’t afford to have Fed officials who are so cozy with the financial industry that they leak valuable information to their friends.”

Schardin added that if the Lacker leak can provide fodder to proponents of a rules-based monetary policy, it can provide cover to those in Congress who would want to restrict agency independence more generally. The Financial Choice Act — House Financial Services Committee chair Jeb Hensarling’s Dodd-Frank reform legislation — would make sweeping changes to regulatory independence beyond monetary policy and the Fed, Schardin said.

“I think [the leak] will be seized on by people who are already suspicious of the Fed,” Schardin said. “That’s a huge issue in Congress, just regulatory independence generally. By far the biggest changes [the Choice Act] would make are to regulatory independence — putting them all on appropriations, the Chevron doctrine stuff, cost-benefit analysis … those would be major changes.”

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