Under pressure, Powell says Fed to revamp its trading rules
Washington — Federal Reserve Chair Jerome Powell said Wednesday that the central bank will overhaul its financial ethics policies in response to growing questions about investing and trading decisions by high-ranking Fed officials that raise potential conflicts of interest.
“It is now clearly seen as not adequate in sustaining the public's trust,” Powell said at a news conference after the Fed's interest-rate setting committee ended a two-day policy meeting. “We need to make changes, and we’re going to do that as a consequence of this."
Powell stopped short of saying explicitly that the trading moves made by the Fed officials were inappropriate. And he offered few details about what the Fed might do or how it would conduct its ethics review.
The issue arose after it was revealed that Robert Kaplan, president of the Federal Reserve Bank of Dallas, traded millions of dollars’ worth of individual stocks such as Amazon, Chevron, Facebook and Johnson & Johnson in 2020, at the same time that the Fed was taking extraordinary measures to boost the economy. The Fed's moves likely lifted stock prices and other financial assets.
Similar financial disclosures showed that Eric Rosengren, president of the Boston Fed, invested last year in real estate investment trusts that held mortgage-backed bonds of the type the Fed itself is buying as part of its broad efforts to lower borrowing rates.
And Powell himself owns municipal bonds, which the Fed bought last year for the first time ever to prevent a collapse in the muni bond market, a move that could have driven up the value of such bonds.
The presidents of the 12 regional banks participate in the Fed's private policymaking meetings, in which they discuss the central bank's interest rate policies and are privy to economic data not always available to the public. The Fed's decisions can cause sharp swings in financial markets. So can the presidents' speeches and comments to the media.
Dennis Kelleher, president of Better Markets, a watchdog group, suggested that Powell's comments Wednesday fell far short of what is needed to reassure the public. He also criticized Powell's remark that the Fed follows ethics rules similar to those of other government agencies that, for example, bar trades made with inside information.
“The Fed is not like other agencies," Kelleher asserted. “It has the most sensitive market-moving information of any federal agency.”
Kelleher suggested that the central bank should direct an outside agency to investigate all the trading practices of Fed presidents and should require additional information from its officials. The Fed's disclosure forms, for example, don't specify when Fed regional presidents Kaplan and Rosengren made their trades.
"The Fed cannot investigate itself, just like Wells Fargo cannot investigate itself," Kelleher said, referring to that bank's regulatory troubles in recent years. "Only an external independent investigation will have any credibility.”
A Fed spokesman said last week that the central bank is taking “a fresh and comprehensive look” at its trading policies. The investments in question were permitted under the Fed’s current rules, and Rosengren and Kaplan said that lawyers at their Fed banks had approved their trades. They have also both pledged to sell their holdings and to reinvest the proceeds into index funds and cash.
At his news conference Wednesday, Powell said Fed officials are subject to the central bank's own trading restrictions, on top of those that all federal agencies follow. Officials, for example, may not trade in the 10 days before a policymaking meeting, when it makes critical decisions about interest rates and other issues. They're also barred from owning bank stocks, because the Fed regulates the banking sector.
One likely change, Powell said, would be for the Fed to bar officials from owning any security that the central bank is itself buying. That's because the Fed's purchases can often — and are intended to — shore up the prices of such securities.
Such a stricture has been harder for the Fed to follow as it has significantly expanded its purchases since last year to stabilize financial markets in the face of the pandemic recession. It bought corporate bonds for the first time, as well as municipal bonds, to steady markets in those securities.
Powell said that his own ownership of municipal bonds was a “a real coincidence” because he had owned them for many years without expecting that the Fed would one day buy them. He said he cleared his ownership with the Office of Government Ethics and hasn't sold any since the Fed began buying muni bonds.
Sen. Elizabeth Warren, a Democrat from Massachusetts, wrote to the 12 regional Fed bank presidents last week urging that they bar all stock holdings by top officials. She asked that they report by Oct. 15 on what steps they plan to take.