Everyone in the financial markets would like to know what U.S. Federal Reserve policymakers are thinking. Will they raise interest rates? Where do they believe that the economy is going? What is their next move, and how will it affect my pocketbook?
In a perfect world, everyone would get an answer to those questions at the same time. But new research from the University of Chicago Booth School of Business finds evidence that suggests Federal Reserve insiders systematically engaged in informal or discreet communication with the financial sector around the time of important policymaking meetings, increasing the probability of at least accidental leaks.
In the working paper, “What Insights Do Taxi Rides Offer into Federal Reserve Leakage?” Chicago Booth PhD candidate David Andrew Finer analyzed more than 500 million New York City taxi rides and finds “highly statistically significant evidence of increases in opportunities for information flow” between the Federal Reserve Bank of New York and major commercial banks around Federal Open Market Committee meetings.
“These inferred meetings might pertain to monetary policy or could be social in nature,” said Finer. “The data don’t tell us. What we do know is that every interaction entails the risk that an outside party might gain valuable insights into the Fed.”
In a nod to the power of Big Data, Finer began his work after the New York City Taxi & Limousine Commission released a dataset of more than a billion individual, anonymous cab rides in Manhattan going back to 2009. The dataset provided precise drop-off and pickup coordinates. For purposes of the study, Finer narrowed the dataset to yellow taxi rides that occurred between 2009 and 2014, omitted weekends and holidays and put other filters in place, yielding a dataset of more than 500 million taxi rides.
Among the study’s key findings:
- The data yield evidence that rides from commercial banks directly to the New York Fed and offsite meetings involving insiders of the New York Fed and commercial banks increased around the time of FOMC meetings.
- The data show a striking increase in rides from the commercial banks to the New York Fed almost immediately after the midnight lifting of the communications blackout. Tight restrictions on Federal Reserve staff communications are in force until midnight the day after an FOMC announcement, and rides to the New York Fed are elevated between 1 and 4 a.m. thereafter. The timing and location suggest that information pertinent to the conduct of monetary policy is being shared. The Fed might, for example, seek information on bond market conditions or provide clarification about the announcement.
- Analysis of nearly coincidental drop-offs suggests that offsite lunchtime meetings between New York Fed insiders and commercial bankers increase around FOMC announcements. Coincidences are elevated from approximately the day before the announcement through a week afterward. The increase might partially reflect pent-up demand for meetings due to the blackout.
- Both the post-blackout direct rides and lunchtime coincidental drop-offs were particularly elevated around monetary policy meetings in 2012, the year of the announcement of the third round of quantitative easing known as QE3.
Leaking information became an issue at the Federal Reserve in 2012 as policymakers worked to ease the effects of the Great Recession. According to the transcripts of 2012 Fed policy meetings released earlier this year, Federal Reserve Chairman Ben Bernanke had warned his colleagues at an October 2012 policy meeting that disclosure of sensitive Fed policy deliberations, even if unintentional, could damage the central bank’s credibility and reputation.
Fed guidelines prohibit officials from discussing confidential information. The rules also restrict Fed policymakers’ and staff members’ ability to speak publicly or grant interviews during the Fed’s blackout periods, which occur around FOMC meetings.
Since this study captures only New York City yellow taxi rides, Finer said he believes that the results of this study represent the lower end of possibilities for changes in interactions around FOMC meetings and that the actual number of additional occurrences might be significantly greater.
“While this research focuses on the Fed and commercial banks, it touches on far more than just opportunities for information flow between financial institutions,” said Finer. “This study provides a taste of what private ride-share companies such as Uber and Lyft can do with their data. It’s just one example of what can be learned from the data that large corporations collect on where we go and when, even if there are no clear personal identifiers.”