A trading crisis? Personal relationships of Fed officials spark controversy and call for change


September 10 (Reuters) – Media reports this week that two of the Federal Reserve’s 12 regional bank chairmen were active traders. Some of the central bank’s outspoken critics question the rules that allowed them to engage in transactions in the first place.

Dallas Fed Chairman Robert Kaplan and Boston Fed Chairman Eric Rosengren made frequent or substantial transactions in 2020, the Wall Street Journal and Bloomberg reported earlier this week. The transactions took place in a year in which the central bank took major steps to support the economy and swoon the financial markets after they were hit by the coronavirus pandemic.

While the transactions were permitted under the ethical guidelines of the Fed’s system, their disclosure prompted some observers and a senior lawmaker to point out possible conflicts of interest.

“Forget about individual trades,” said Benjamin Dulchin, director of the Fed Up Campaign at the Center for Popular Democracy, a group that advocates for the Fed to focus more on the needs of American workers. “The problem is that a president of a Fed bank – one of the few people who (…) defined our country’s monetary policy – so clearly has his personal interests aligned with the success of our most large companies.”

On Thursday, Kaplan and Rosengren said in separate statements that their transactions complied with the Fed’s ethical guidelines. They also said they would change their investment practices to address “even the appearance of any conflict of interest” and sell all individual holdings by September 30, shifting the proceeds to cash or index funds. passively invested. Kaplan and Rosengren have both said they will not trade on these accounts while they are Fed chairmen.

The changes came after they both came under fire for trades made last year, which were first reported by The Wall Street Journal here this week. Each has since made public its annual financial statements.

The documents showed that Kaplan, for example, bought and sold at least $ 18 million of individual stocks in 2020, mostly tech stocks like Apple Inc and Amazon.com Inc and energy stocks like Marathon Petroleum Corp. All of these transactions have been reviewed by the Dallas Fed General Counsel, Dallas Fed spokesman James Hoard said.

Rosengren, who has publicly shared his concerns about the potential risks of overvaluation in the commercial real estate industry, held stakes in four real estate investment trusts and carried out other investment transactions, as a Bloomberg report points out. here.

“Unfortunately, the emergence of such authorized personal investment decisions raised some questions, so I made the decision to divest these assets to underscore my commitment to the Fed’s ethical guidelines,” Rosengren said in a statement Thursday. .


Fed officials are subject to specific restrictions, such as not trading during the “blackout period” around each Fed meeting when policy-sensitive information is released, not holding stocks in banks or mutual funds concentrated in the financial sector and do not resell securities within 30 days of purchase.

But the code of conduct also has a broader language.

“An employee must avoid any situation that could give rise to a real conflict of interest or even to the appearance of a conflict of interest,” the code specifies. Those with access to information on market movements “should avoid engaging in any financial transaction the timing of which might appear to be acting on inside information concerning the deliberations and actions of the Federal Reserve.”

Financial information did not appear to differ significantly from previous years. But 2020 was a signing year for the Fed in which, on its own behalf, it crossed the “red lines” to ensure the continued functioning of financial markets. In a swift response to the then unfolding pandemic, Fed policymakers in March 2020 cut interest rates to near zero and rolled out programs designed to keep the Treasury bond markets, securities markets running smoothly. mortgage backed and corporate bonds.

The Fed’s swift action has been hailed for helping avert a further collapse in financial markets, an achievement according to Fed officials that has helped to minimize the blow to the economy. But some have criticized the Fed’s actions for helping to raise asset prices while not doing enough to support small businesses and Main Street households.

Some Fed watchers say it may be time to review the rules.

“This is further proof that the oversight of the chairmen of regional Federal Reserve banks is broken,” said Aaron Klein, senior researcher at the Brookings Institution. “I don’t know if this is a breach of the rules or a breach of the rules.”

US Senator Elizabeth Warren, long one of Washington’s most vocal critics of the central bank’s approach to financial regulation, said Fed officials should not be allowed to negotiate .

“I have said it before and I will say it again: Members of Congress and senior officials should not be allowed to trade or own stock,” Warren wrote on Twitter. here Friday. “Period.” (Reporting by Jonnelle Marte in New York, Howard Schneider in Washington and Ann Saphir in Berkeley, California, editing by Dan Burns and Matthew Lewis)

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