One would assume that if the financial media became aware that the Fed was leaking information to certain key investors, that this would make major headlines.
After all, the Fed is supposed to be both independent and transparent. And leaking information to certain individuals ahead of release would border on abetting insider trading. That would be truly outrageous.
Of course, perhaps we are assuming too much that anyone would do anything about the clear evidence that there are leaks. After all, Ben Bernanke openly lied to Congress about monetizing the debt and nothing happened to him. So what difference would it make if the Fed was leaking information to certain well connected groups?
Well, from a market perspective, it would make a HUGE difference.
Markets might be right about the value of close relations with the Fed. A paper recently presented at the NBER by Anna Cieslak, Adair Morse and Annette Vissing-Jorgensen —titled "Stock Returns over the FOMC Cycle"—finds evidence suggesting that the Fed has been leaking information. Senior Fed officials regularly gather between their highly publicized Federal Open Market Committee meetings to discuss monetary policy. Although the information from these lesser-known meetings is not released to the public until weeks later, the authors found that stock prices respond immediately after the meetings, suggesting that people and financial institutions are trading and possibly profiting on information contained in those meetings.
http://online.wsj.com/articles/stephen-haber-...anks-1410304778
Of course, it could be coincidence that the markets react as soon as the Fed finishes its FOMC meetings (several weeks before the contents of the meetings released to the public).
It could, of course, also be coincidence that the stocks for various financial firms rally when an individual with close relationships to those firms is announced as Treasury Secretary.
A growing body of academic research indicates that the stock market values these bank-Fed connections. A 2013National Bureau of Economic Research paper by Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton, "The Value of Connections in Turbulent Times: Evidence from the United States," provides a case in point. In November 2008, when it was announced that then-New York Fed President Timothy Geithner would be nominated for Treasury secretary, the stock prices of financial firms with which he had close personal connections soared relative to those of other financial firms. Those same stock prices plummeted when his nomination briefly ran into problems over his taxes.
http://online.wsj.com/articles/stephen-hab...anks-1410304778
Or, it could be that the markets is simply discounting what everyone knows deep down… that the Fed is not independent and actually has a broad history of giving non-public information to certain market participants WAY in advance of the rest of us. Moreover, most of the Fed's claims that its policies are aimed at helping Main Street are in fact totally bogus if not outright dishonest (the evidence runs completely counter to such claims).
This is why Capitalism is failing in the US: because not only is it now clear that the US economy is, for the most part, a rigged game… but that NO ONE involved in the rigging is punished.
Democratic capitalism is what made the US the super power that it is. This paradigm embodied the virtue that if you took risks and worked hard, you could create real wealth for yourself. It was a paradigm of self-employment, entrepreneurialism, and a strong work ethic.
Just as importantly, in Democratic Capitalism there is the rule of law, where by if someone cheats of steals in order to get ahead, they not only run the risk of getting caught; they also are punished.
You cannot build a financial system on fraud and cheating, anymore than you can build a house on a faulty foundation. The structure might hold up for a while, but eventually it will all come crashing down.
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