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Lacker leak revelation sets up Fed for additional political pressure

The surprise resignation of Jeffrey Lacker, and the former Federal Reserve Bank of Richmond president admitting to his role in an embarrassing leak of confidential information that has dogged the central bank for years, is likely to reverberate through the bank for some time.

Lacker had been slated to retire later this year, but said April 4 he would step down immediately from his post and admitted to confirming confidential details about the Federal Open Market Committee's deliberations, as well as later misleading the Fed's general counsel as the organization conducted a review of the leak.

The admission by such a well-known and long-tenured official Lacker became Richmond Fed president in 2004 within the Fed is a black eye for the bank. The Fed has faced rising political pressure in the years after the financial crisis from lawmakers who have long eyed an overhaul of its structure, governance and approach to monetary policy. The timing for one of the major scandals in the central bank's history is particularly poor for policymakers; President Donald Trump singled out the bank for criticism during his campaign and is widely expected to replace Federal Reserve Chair Janet Yellen when her term atop the bank expires early next year.

The news is also a public-relations headache for a short-staffed Federal Reserve Board focused on keeping its plans to normalize interest rates and the bank's balance sheet this year on track.

"Having a senior member of the Federal Reserve System resign in a cloud of scandal is a blow to the Fed's institutional credibility," Peter Conti-Brown, a Fed historian and professor of legal studies and business ethics at The Wharton School, said. Still, Conti-Brown noted that many of the conservative lawmakers driving the political push against the Fed share Lacker's inflation-focused monetary policy views and his worries about the massive series of asset purchases the central bank undertook in the wake of the financial crisis. That makes it difficult to tell "what form the political fallout" will take in the coming weeks, he added.

"It's a blot. It's an embarrassment for [Lacker], and for the whole institution," Ernie Patrikis, a partner with White & Case LLP and former general counsel and COO of the Federal Reserve Bank of New York, said in an interview. He added that Fed policymakers are hoping that the public identification of Lacker's involvement will help them "get some relief from the issue," which has been the subject of multiple reviews by the bank's inspector general, and also investigated by federal law enforcement.

Lacker said in his April 4 statement that he finally admitted to confirming the confidential data as part of those federal probes.

Both Patrikis and Conti-Brown also noted that the involvement of a high-level official in leaking confidential FOMC information is essentially unprecedented at the bank. While a former New York Fed director was convicted of trading information on the direction of rates in the 1980s, regional directors do not attend FOMC meetings and are minor players in policy formation compared to regional bank presidents.

Patrikis argued that the Fed can push back against political pressure ignited by Lacker's disclosure by citing an otherwise solid record on confidentiality during its history and that despite the news about Lacker he thinks most central bank employees take pride in protecting its secrets.

Still, it seems likely that lawmakers who have railed against the bank's level of transparency, or its cooperation in this leak investigation, will seize an opportunity to score political points against the bank and advance their own agenda. Rep. Sean Duffy, R-Wis., who chairs the Financial Services Committee's Oversight and Investigation subcommittee, has attacked the Fed for not complying with his inquiries into the leak, or cooperating with a subpoena issued by Financial Services chair Rep. Jeb Hensarling, R-Texas. Both lawmakers are also at the vanguard of a movement that hope to introduce major changes to the Fed, including tying its monetary policy decisions to a strict rule or allowing lawmakers greater oversight of monetary policy decisions — both measures that Fed officials vehemently oppose as threats to their independence.

"There are a number of people in Washington who would like to limit the Fed's authority in various areas, and this incident could raise some additional suspicion about the way the Fed operates," said Justin Schardin, director of the financial regulatory reform initiative for the Bipartisan Policy Center.

And the story could still take another bad turn for the bank. The exact wording of the statement issued by Lacker's law firm suggests that he confirmed information which had already been leaked outside of the Fed, fueling speculation that there could be other Fed officials or staffers still to be caught up in one of its lowest episodes.