Now, the Fed’s stock trading issues and the political clashes over who Biden should make Fed chair appear to be colliding. Some on the left argue that Powell holds ultimate responsibility for the Fed’s ethics problems, and that Powell should never have been engaged in the markets while Fed policy was so entrenched in fighting the covid recession.
Others say the fixation on Powell’s financial history has been motivated by political mudslinging. And they say it ultimately distracts from and undermines the Fed’s core challenge of how to improve its rules moving forward.
“Not all transactions are created equal,” said Dylan Hedtler-Gaudette, government affairs manager at the Project on Government Oversight. “[Powell] in particular has this very special and idiosyncratic place in all of this. … Even if what he did in this particular case may not have actually been an example of anything nefarious, he needs to be extremely careful and extremely judicious in the ways he does these things.”
Scrutiny over the financial activities of Fed officials ripped open after the Wall Street Journal and other outlets first reported on trades made last year by Robert Kaplan, former head of the Dallas Fed, and Eric Rosengren, who ran the Boston Fed. Kaplan’s trading activity included 27 individual stocks, funds or alternative asset holdings, each valued at over $1 million. Rosengren’s trading activities were on a smaller top-line scale but drew scrutiny for stakes in four separate real estate investment trusts at a time when he was speaking about his concerns for the commercial real estate sector.
The Fed has since announced an independent review by its inspector general over whether that behavior complied with ethics rules and the law. Powell himself has said the central bank’s existing guidelines are clearly inadequate “to the task of really sustaining the public’s trust in us” and that no one at the Fed “is happy to be in this situation.”
Powell’s financial disclosures show 26 transactions last year, including 19 that were for automatic dividend reinvestments — essentially transactions on autopilot and not subject to individual decisions, according to a Fed spokeswoman. One transaction was related to education expenses, through a personal 529-college savings plan.
Six were withdrawals for family expenses. The largest, by far, was the Oct. 1 sale of a Vanguard Stock Market Index fund valued between $1 million and $5 million. Two other withdrawals in December were sized between $100,000 and $250,000.
Powell did not trade any individual stocks, and the Fed says the transactions were all allowed under existing Fed guidelines.
The 2020 financial activities of Fed officials have come under a particular spotlight given how involved the central bank was in the markets last year. As the pandemic tore through the economy, the Fed launched a massive rescue effort that kept the economy and financial system from imploding even further. Fed officials are privy to extremely sensitive information, and their deliberations are kept confidential so as not to shift the markets.
As a result, experts say it is difficult to parse what is and is not considered a conflict or interest — or at the least, the appearance of one — when officials make personal transactions or trades. Holding diversified or exchange-traded funds, for example, is often what government ethicists encourage to avoid conflicts of interest, short of barring people from parking their money in the markets at all.
Dennis Kelleher, president of Better Markets, which advocates for stronger Wall Street oversight, said that even if Powell’s financial transactions were different from Rosengren’s or Kaplan’s, any type of activity “still shows incredibly bad judgment” as the economy was suffering.
“Regardless of motive or intent, Chair Powell’s pandemic trading further undermines public confidence and trust in the Fed at a time when it can least afford it due to pending major policy changes,” Kelleher said.
The debate over Fed ethics rules is playing out while the Fed is grappling with slowing job growth, high inflation and uncertainty over how long supply chain issues and elevated prices will last. Despite the head winds, the Fed is expected to start easing its support for the markets before the end of the year, likely with a formal announcement at the next policy meeting in November.
In that void, Powell’s detractors on the left have ramped up their calls against a second term. In recent months, his critics point to his views on banking regulation and argue Powell should have been more aggressive on climate change issues. Sen. Elizabeth Warren (D-Mass.) has been most vocal on that front, calling Powell a “dangerous man” over the Fed’s moves to ease Wall Street oversight since the Great Recession.
So far, those arguments don’t seem to have convinced other Democrats on the Senate Banking Committee or decision makers in the White House. The only other candidate widely considered to be in the running for Fed chair is Lael Brainard, the lone Democrat on the Fed board. Brainard’s supporters point out that her financial disclosure form lists zero transactions in 2020.
Some people close to the Fed privately viewed criticism of Powell’s financial history as intended to thwart a possible second term. They cautioned against drawing comparisons between his financial activity and that of Rosengren and Kaplan — and if anything, note that Powell likely lost money on the large Oct. 1 withdrawal. (The stock market dipped in October as the pandemic continued to pummel the economy. But the market rallied toward the end of the year and ended 2020 at all-time highs.)
“What seems to be happening here is that some people are trying to do whatever they can to derail Powell’s candidacy and use weak arguments — factually weak arguments,” said Roberto Perli, a former Fed economist and head of global policy at Cornerstone Macro. “Of course politically it might be a little bit different. I cannot believe that the White House will be swayed by this type of thing.”