The Federal Reserve's internal watchdog has raised serious concerns about potential confidential information sharing between Federal Open Market Committee (FOMC) members and regional bank directors. According to reports from Bloomberg, the Fed's Office of Inspector General called attention to instances where board members at regional banks were briefed by policymakers prior to, or immediately after, policy meetings. The report specifically highlighted that sensitive FOMC information could have been shared with directors, potentially granting them access to nonpublic information that could be used for personal gain. As per Bloomberg, the inspector general emphasized that incoming directors need to be made aware of their duties and the federal conflicts-of-interest statute and related criminal penalties. The watchdog also recommended stronger conflict-of-interest safeguards in the selection of regional Fed presidents and directors.
Reserve bank boards meet regularly to make recommendations to the Fed's Board of Governors on the interest rate that commercial banks pay to borrow from the Fed's discount window. As reported by Bloomberg, each board typically meets with its president — who sits on the Fed's policy-making panel — and other staff members, and sometimes hears the president's recommendation for the discount rate, which is closely tied to the Fed's benchmark policy rate. While policymakers are prohibited from sharing information about Federal Open Market Committee meetings, where the overnight federal funds rate is set, the report said minutes from meetings between reserve bank boards and presidents showed instances in which sensitive FOMC information could have been shared with directors. In one concerning instance, a reserve bank president held a 'broad-ranging discussion about various topics, including projected inflation trends and emerging global economic uncertainty' with directors just one day after a policy meeting.
The report detailed concerning instances of information sharing, including one case where a reserve bank president held a 'broad-ranging discussion about various topics, including projected inflation trends and emerging global economic uncertainty' with directors just one day after a policy meeting. According to Bloomberg, such forward-looking discussion of economic conditions days after an FOMC meeting could cover nonpublic confidential information. Additionally, in October 2015, the New York Fed changed its protocols after then-President William Dudley told his board that the president's recommendation on the discount rate might be viewed by some as conveying information about the likelihood that the FOMC will change the fed funds rate. The minutes also show the New York president was thereafter removed from the process of making a recommendation on the discount rate.
The Fed's Office of Inspector General released its report on September 2, prompting a response from the Board of Governors. As reported by Bloomberg, Benjamin McDonough, the board's secretary, and two other senior staffers pushed back against the points raised about the handling of confidential information. The Board of Governors letter defended the practice of briefings with directors, stating that briefings didn't create a potential for directors to obtain confidential information because Federal Reserve System staff and policymakers are prohibited from providing confidential FOMC information to directors. The letter described these briefings as 'crucial conduits of nonconfidential information that helps directors meet their responsibilities'. However, the report noted that some selections for regional presidents have taken an unusually long time, while others were scrutinised for the appearance of conflicts of interest.
The review included comprehensive recommendations for reducing conflicts of interest in regional bank leadership selection processes. According to Bloomberg, the report recommended that regional banks using external search firms to identify candidates should monitor and disclose any potential conflicts of interest between the firms and the candidates. The report highlighted that banks are not currently required to identify or report these conflicts, and noted that in late 2022, the appointment of Austan Goolsbee faced criticism because his wife was an executive at the search firm hired by the Chicago Fed. The report also drew attention to the process for selecting Class C directors, noting that at 9 of the 12 reserve banks, Class A directors — those representing banks — are involved in recruiting or approving the Class C directors, which may give member banks undue influence over board composition. The Inspector General recommended the Board of Governors provide reserve banks with written guidance clarifying the process for selecting Class C directors.
