Anger trade? The personal relationships of Fed officials are controversial and call for change

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

Dallas Fed Chairman Robert Kaplan and Boston Fed Chairman Eric Rosengren conducted frequent or substantial transactions in 2020, the Wall Street Journal and Bloomberg reported earlier this week. The operations came during a year in which the central bank took major actions to boost the economy and erode financial markets after being hit by the coronavirus pandemic. Read more

Although transactions were permitted in accordance with the Fed’s ethical guidelines, their disclosure caused some observers and a senior legislator to mark possible conflicts of interest.

“Forget 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 point is that a president of a Fed bank – one of the few people who … sets our country’s monetary policy – has so clearly his personal interests aligned with the success of our large companies” .

On Thursday, Kaplan and Rosengren said in separate statements that their trades met Fed ethical standards. They also said it would change its investment practices to address “even the emergence of any conflict of interest” and sell all individual holdings before Sept. 30, shifting income to cash or passively invested index funds. . Both Kaplan and Rosengren said they would not negotiate on these accounts while they were chairing the Fed.

The changes came after they both faced criticism for transactions last year, deals the Wall Street Journal first reported this week. Since then, everyone has made their annual financial information public.

The documents showed that Kaplan, for example, bought and sold at least $ 18 million in individual shares by 2020, primarily technology stocks such as Apple Inc. (AAPL.O) and Amazon.com Inc. (AMZN.O) and energy stocks. with Marathon Petroleum Corp (MPC.N). All of these transactions were reviewed by Dallas Fed General Counsel, said Dallas Fed spokesman James Hoard.

Rosengren, who has publicly shared her concerns about possible risks of overvaluation in the commercial real estate sector, participated in four real estate investment trusts and conducted other investment transactions, as highlighted in a Bloomberg report.

“Unfortunately, the emergence of these permitted personal investment decisions has 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. this Thursday.

CALLED FORRIES FOR SUPERIOR SUPERVISION

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

But the Code of Conduct also has a broader language.

“An employee must avoid any situation that could lead to a real conflict of interest or even the occurrence of a conflict of interest,” the code says. Those with access to market information “should avoid participating in any financial transaction at which time it may create the appearance of acting on inside information about Federal Reserve deliberations and actions.”

Financial disclosures did not look surprisingly different from previous years. But 2020 was a signing year for the Fed in which, on its own, it crossed the “red lines” to ensure that financial markets continued to function. In a rapid response to the pandemic that was unfolding at the time, Fed policymakers cut interest rates to near zero and deployed programs aimed at keeping the Treasury bond, mortgage and corporate bond markets free. problems.

The Fed’s swift action to help prevent a further collapse of the financial market was praised, a success said by Fed officials that helped minimize the impacts of the economy. But some criticized the Fed’s moves to help raise asset prices while not doing enough to support small businesses and high street households.

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

“This is further evidence that shows that the oversight of Federal Reserve regional bank presidents is broken,” said Aaron Klein, a senior member of the Brookings Institution. “I don’t know if it’s a failure to enforce the rules or a failure of the rules.”

U.S. Sen. Elizabeth Warren, one of Washington’s most vocal critics of the central bank’s approach to financial regulation, said Fed officials should not be allowed to trade.

“I have already said this and I will say it again: members of Congress and senior government officials should not be allowed to negotiate or take shares,” Warren posted in Twitter Friday. “Point”.

Report by Jonnelle Marte in New York, Howard Schneider in Washington and Ann Saphir in Berkeley, California. Edited by Dan Burns and Matthew Lewis

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