Fed Economists' Stakes in Forecasting Firm Spur an Internal Probe

By Katy Burne Features Dow Jones Newswires

The Federal Reserve's internal watchdog is probing a group of Fed economists who also own shares in a U.K. economic-forecasting company, a person familiar with the matter said.

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At issue is whether the economists' ownership stakes in the private firm could have created a conflict of interest.

The inquiry, by the Fed's Office of Inspector General, centers on four economists who also have owned shares in London-based Now-Casting Economics Ltd., the person said. The inquiry is at a preliminary stage, this person said.

Like the Fed, the U.K. company makes short-term economic forecasts using real-time data. It sells that information to investment firms, such as hedge funds, which use it to help make market bets. Having a vested interest in the U.K. company puts the Fed economists in a position where they could be suspected of a conflict or the appearance that the U.K. company is selling access to such information.

The Fed's code of conduct says employees "should avoid any situation that might give rise to an actual conflict of interest or even the appearance of a conflict of interest." The Fed has policies in place that govern information security.

The OIG was notified of the matter by a U.S. economic forecasting and financial-technology company, Economic Alchemy LLC, which is a defendant in a trademark dispute with the Fed and Now-Casting Economics, legal filings with the U.S. Patent and Trademark Office show.

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In those filings, Economic Alchemy Chief Executive Giselle Guzman said the "mere perception" that the Fed economists might have access to nonpublic monetary-policy information could boost the U.K. firm at the expense of its rivals.

None of the information exhibited by Ms. Guzman and Economic Alchemy would indicate the U.K. firm or the economists have traded on confidential Fed information.

A spokesman for the Fed's OIG declined to comment on the office's activities. William Mason, an OIG investigator, said he was "unable to talk about things ongoing, especially an investigative matter."

In filings, Ms. Guzman said the OIG acknowledged receiving the complaint and that she got a call from Mr. Mason, who had requested a meeting.

A spokesman for the Fed board of governors said in a statement, "Our practice is to neither confirm nor deny investigations." The central bank didn't provide any documents in response to a public-records request.

Both Now-Casting Economics and the Fed regularly make forecasts on the U.S.'s gross domestic product, the value of everything produced and widely considered the best way to measure the economy. Now-Casting Economics on Friday predicted that GDP would rise an annualized 3.9% in this year's fourth quarter.

Ms. Guzman alleged in the letter to the OIG that one of the economists, Domenico Giannone -- an assistant vice president in macroeconomic and monetary studies at the Federal Reserve Bank of New York -- is violating conflict-of-interest rules for federal employees as well as the Fed's code of conduct.

Mr. Giannone, 44 years old and a co-founder of Now-Casting Economics, said he disclosed his "involvement" in the U.K. firm before joining the Fed in late 2014. He now owns 30.5% of the U.K. firm, the firm said. Filings with a U.K. government agency still list him as a "person with significant control" in the company.

Mr. Giannone said he resigned as a Now-Casting Economics director in 2014, just before joining the Fed, and has complied with conditions on his employment set by the New York Fed's ethics office. An Italian national, he also worked for the European Central Bank from 2007 to 2009, a bio posted to the Fed's website shows.

"I do not vote my shares or participate in the business," he said in an email. "Any suggestion that I have acted improperly is false."

Now-Casting Economics CEO Jasper McMahon said Mr. Giannone "has had no role whatsoever in the company" since 2014. The company didn't file Mr. Giannone's resignation notice with the U.K. government that year, when it was supposed to. The notice was filed May 24 of this year, a delay that Mr. McMahon called an "inadvertent mistake."

Consequent filings that show Mr. Giannone as an active officer as recently as Feb. 10, 2017, also were a mistake, Mr. McMahon said.

A New York Fed spokeswoman said Mr. Giannone disclosed his "role and interest in the U.K. company" before joining. She said a condition of his Fed employment was that he not have access to high-level money-policy decisions and nonpublic views by Fed officials on the likely future direction of policy making.

Another condition from the New York Fed, she added, was that Mr. Giannone "not participate personally and substantially" in any Fed matter that could financially benefit him or his company.

Mr. Guzman's allegations cite three other Fed economists with shares in the U.K. firm. The Fed declined to comment on them, and Mr. McMahon said the company has "taken great care...to avoid any such conflicts."

The legal filings came as part of the trademark dispute between Economic Alchemy and Now-Casting Economics.

In April 2016, the New York Fed, with the assistance of Mr. Giannone, launched a weekly economic bulletin called "Nowcasting Report."

Ms. Guzman trademarked the terms "Now-Cast" and "Nowcast" in the U.S. in 2013 and said she also trademarked the term in Japan, Canada and Switzerland, licensing the terms to her company's affiliate Now-Cast Corp.

Mr. McMahon said the term is generic and "has been used in the industry for many years."

Write to Katy Burne at katy.burne@wsj.com

(END) Dow Jones Newswires

October 10, 2017 10:47 ET (14:47 GMT)