On March 23 last year, as the Federal Reserve took extraordinary steps to bolster financial markets at the onset of the pandemic, the central bank’s Washington, DC Ethics Office sent out a warning.
Officials may want to avoid unnecessary trading for months as the Fed delves deeper into the markets, says an email from the Ethics Department of the Board of Governors, a message sent to regional bank presidents by their own ethics officers.
The directives came just as the Fed announced a massive bailout package aimed at bolstering or bailing out markets, including corporate bonds and midsize debt. This seems to have been heeded: most of the regional presidents and Fed governors did not participate in active trading in April on the basis of their disclosures.
But the recommendation, which the person who saw the email affirmed, didn’t go far enough to stave off the trade scandal that the Fed has now gripped and is being used against its chairman, Jerome H. Powell, as the White House ponders whether to reappoint him before he expires. powers early next year.
The email could have created additional problems for the Fed, which declined to provide a copy because it shows that central bank ethics officers – and officials in general – knew that active trading could look bad when the Fed takes emergency action to try to save money. the markets and its politicians had wide access to confidential information. Despite early warning, some senior officials resumed trading after the most active phase of the Fed’s bailout ended, based on financial disclosures and preliminary comments from regional banks.
Financial disclosures first published by The Wall Street Journal showed that Robert S. Kaplan traded millions of dollars worth of individual stocks last year when he was the head of the Federal Reserve Bank of Dallas. There are no dates for these purchases and sales, but a Dallas Fed spokesman said they did not take place between late March and late April.
Another Fed official, Eric S. Rosengren, bought and sold real estate securities while running the Boston Federal Reserve Bank. Such securities are sensitive to Fed policy and tied to the market that Mr. Rosengren himself warned about in his public speeches last year. His trade resumed in May, his reports show.
Both Mr. Kaplan and Mr. Rosengren have since stepped down, with Mr. Kaplan saying he doesn’t want controversy around his operations to distract from the Fed’s work, and Mr. Rosengren citing health concerns.
While attention to the Fed’s ethics rules – and the Fed’s trading habits – began with its 12 regional offices, journalists and academics began to revise previously reported trades by Fed officials who serve on its Washington board of directors.
Richard H. Clarida, vice chairman of the Fed, rebalanced the portfolio towards equities in late February 2020, just before the Fed signaled it was ready to help markets and the economy in the face of the coronavirus pandemic. The timing raised questions, although the transactions matched the previous transactions he had made. Since then, the deputy chairman has said that he has always acted “honestly and honestly” in public office.
Mr. Powell has also faced backlash, primarily from progressives who do not want him to be reappointed, for the sale of the popular and widespread stock index last October. The Fed was not rolling out any new bailout programs at the time, and a spokeswoman said Mr. Powell had sold the holdings to pay for family expenses. Mr. Powell’s critics argue that he shouldn’t have been active financially in the past year at all.
Oct 20, 2021 4:32 PM ET
As ethical controversies escalate, the Fed is working to prevent the consequences.
Mr. Kaplan and Mr. Rosengren announced last month that they would step down, while Mr. Powell said that “no one is happy” with the situation. He began reviewing the Fed’s ethical rules shortly after news broke about the presidential bidding. He also asked an independent watchdog to review the transactions to make sure they comply with ethical rules and the law.
But the review is ongoing, in part because Mr. Powell is due for reappointment.
“It speaks of governance, incentives and general attitude,” said Simon Johnson, an economist at MIT who previously wrote for Project Syndicate in support of Lael Brainard, a leading candidate to replace Mr. Powell.
Mr. Johnson, who does not personally know Ms. Brainard, the Fed governor, was among those who informed reporters about Mr. Powell’s deal. He focused on the fact that Mr. Powell sold the fund when he was in regular contact with the treasury secretary during an active year for the central bank, and said he believed the trade scandal should affect the chances of reappointment. chairman of the Fed. …
“Presumably someone in the White House will pay attention and consider the details,” Johnson said.
Mr. Powell’s October deal and questions about it underscore that Fed Chairmen can now safely sell assets to get cash if they need it, said Peter Conti-Brown, a Fed professor and historian at the University of Pennsylvania. This reinforces the need to update the Fed’s rules to rule out any manifestation of conflict, depriving officials of discretion, he said.
“I find it hard to blame him for doing it when he did it,” said Mr Conti-Brown, later adding that “it would be more of a scandal if this deal ended Chairman Powell’s career as head central bank “.
The March 23 directives by the board of directors appear to have some effect because central bank officials generally did little to trade during the most active market period last year, in March and April.
Mr. Powell’s only dated deals were in September, October and December. Mr. Clarida came in February and August. Ms. Brainard did not report any deals last year.
It is shown that Randal K. Quarles, then the Fed’s deputy chairman for oversight, bought a financial stake in the fund in early April; the family fund, in which his wife is interested, bought a stake in the fund, which the couple sold before the fund acquired any securities, a Fed spokesman said. Michelle Bowman, Fed Governor, saw a small sale in mid-April. It came from a retirement fund held in her spouse’s medical savings account and reflected the closure of the account when her husband changed jobs, a Fed spokesman said.
At regional banks, executives in San Francisco, Minneapolis, Chicago, St. Louis and Kansas City, Missouri did not flag the disclosure or only noted the college savings plan and pension contributions last year. John C. Williams, president of the powerful New York Fed, reported one personal deal in December.
The Richmond, Virginia Fed president announced private equity and bond deals in July and August, and the Atlanta Fed president helped buy Utah property in June. The Cleveland Fed President announced the purchases of ETF shares in February but then stopped until November.
The Philadelphia Fed President made several relatively small deals during April and the year, but a spokeswoman for his bank said spring trading was not active. These included automatic liquidation from the legacy fund that occurs every year, automatic reinvestment of dividends, and recall of bonds.
The fact that trading more or less halted last spring is positive, Conti-Brown said. Regional Reserve Banks are quasi-private institutions, so it is not entirely clear whether they should heed the Board of Governors on such matters.
“This tells us that the board has the ability to monitor compliance with ethical standards in the system,” he said. “What is missing is a better set of rules.”