The incidents spurred an independent review by the Office of Inspector General for the Federal Reserve Board, and the Fed on Monday issued a rare public statement saying the probe was meant to ensure the trading behavior “was in compliance with both the relevant ethics rules and the law.” The Fed is also undergoing its own ethics review of trading rules for top officials.
The series of events have ratcheted up calls from lawmakers, economists and good-government advocates for a crackdown at the Fed and its rules governing officials’ financial activity. The past few weeks have also jeopardized the Fed’s public trust, experts say, at a time when it needs the country’s confidence to navigate the ongoing pandemic and its economic fallout.
“The Fed’s credibility, going back decades, is that it is a good-faith broker,” said Peter Conti-Brown, an expert on Fed history and financial regulation at The University of Pennsylvania. “When central bankers are making bets we can no longer assume they’re making policy for [the public’s] benefit.”
The spotlight comes at a particularly difficult time for the Fed. The economic recovery is slowing, in large part due to the spread of the delta variant. The Fed is also preparing to start easing its support for the markets, probably in November. Casting a shadow over it all are fundamental questions about who will lead the Fed in the coming months, and whether President Biden will keep Jerome H. Powell on as chair.
Asked whether he had confidence in Powell, Biden on Tuesday told reporters, “well, thus far, yes, but I’m just catching up to some of these assertions.” Earlier that morning, Treasury Secretary Janet Yellen was asked on CNBC whether Biden should renominate Powell. Speaking generally, Yellen said “it’s up to the president to make a nomination, and the president hasn’t yet made that decision.”
Nevertheless, the events have emboldened Powell’s detractors, who previously anchored their criticisms of Powell on the Fed’s moves to ease banking regulation since the Great Recession. During a speech on the Senate floor on Tuesday, Sen. Elizabeth Warren (D-Mass.) said “a “very disturbing picture is emerging” and that “we need changes at the Fed.”
“Our nation does not need a go-along-to-get-along leader who doesn’t know or doesn’t care when, on his watch, people with great responsibility advance their own interests over those of our nation, or someone who drags his feet in dealing with problems that shake the public’s confidence in the institution he leads,” Warren said.
Groups such as Better Markets, which advocates for stronger Wall Street oversight, have also condemned the Fed’s leadership and called for sweeping changes that can answer “if the regional presidents were just the tip of the iceberg of widespread trading.” Still, the scandal does not appear to have inspired a groundswell of opposition to Powell getting a second term, at least so far.
Powell has won praise across Washington for his leadership during the covid crisis, and many Fed watchers expect he will be renominated. Roberto Perli, a former Fed economist and head of global policy at Cornerstone Macro, cautioned against pinning too much of the questionable stock trading behavior on Powell himself.
“The issue with some Fed officials trading securities they shouldn’t have is squarely on those officials (Kaplan and Rosengren, not really Clarida) because they violated the Fed’s code of conduct,” Perli tweeted on Tuesday.
Still, Fed experts say there are plenty of questions about how the trading activity went unexamined for so long, and who in the chain of command should have flagged the financial disclosures, especially those of Kaplan and Rosengren, sooner.
That has drawn attention to the process through which reserve bank presidents are renominated to new terms. The most recent cycle was overseen by Fed Gov. Lael Brainard, who described the process as “rigorous” when all 12 regional bank presidents were approved for new five-year terms in January.
Brainard is also considered to be the only other contender for Fed chair and is the only Democrat on the Fed board. Her wide-ranging portfolio includes a focus on climate change and the modernization of the Community Reinvestment Act. Last year, Powell brought Brainard into the Fed’s close inner circle — a group traditionally confined to the Fed chair, vice chair and New York Fed president — that shapes the monetary policy agenda.
During a news conference in September, Powell said he did not “have any reason to think people at the Board would have known about particular trading that’s going on.” But it is unclear why or how that is, with some Fed experts pointing to a series of thorny rules governing the reserve banks. And some Fed experts say that if Powell shoulders any blame for that process, then Brainard does, too.
“The primary alternative from [Powell’s] critics is someone who is even closer to the reserve bank process,” Conti-Brown, of the University of Pennsylvania, said. “If Powell goes down, Brainard goes down first. It was her responsibility.”
For now, the independent review is being handled by the Office of Inspector General for the Federal Reserve Board. If any criminal laws were violated, that could prompt the involvement of the Justice Department. The Securities and Exchange Commission would become involved if civil securities laws were broken. On Monday, Warren called for an SEC investigation into whether the trades violated insider trading rules.
A spokesperson for the OIG said Powell “has requested that we conduct an independent review of these matters” but declined to comment further. It is unknown how long the review will take.