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The Fed signals that its close to withdrawing some economic support.

  • September 22, 2021

The Federal Reserve chair, Jerome H. Powell, said on Wednesday that the central bank’s rules governing the types of assets that Fed officials can invest in would need to be updated, noting that the rules are “clearly seen as not adequate to the task of really sustaining the public’s trust in us.”

His comments, at a news conference after the Fed’s two-day policy meeting, addressed concerns about securities trading that two of Mr. Powell’s colleagues — Robert Kaplan, president of the Federal Reserve Bank of Dallas, and Eric Rosengren, president of the Federal Reserve Bank of Boston — engaged in last year, when the Fed was carrying out a sweeping market rescue in response to the coronavirus pandemic.

“We will make changes,” Mr. Powell said, adding that “no one is happy.”

“This is an important moment for the Fed,” he said, “and I am determined that we will rise to the moment. We need to do better, and we will.”

According to a Dallas Fed spokesperson, along with disclosures from the Boston Fed, the notable trades did not happen in late March or April, when the central bank was particularly active in markets. Yet even the possibility that Fed policymakers could make financial decisions informed by their privileged knowledge of central bank deliberations has drawn outrage and calls for changes to the rules that govern how Fed officials participate in financial markets.

“To even have to ask the question whether these critically important Fed guardians of the economy are profiteering off their official knowledge, expertise and activity is devastating to the public confidence,” said Norman Eisen, a senior fellow at the Brookings Institution who was an ethics adviser to former President Barack Obama.

Mr. Powell has asked the Fed’s staff to review ethics rules around what senior officials are allowed to invest in and buy or sell, a spokesperson for the central bank said last week. And the two officials whose trades drew attention have pledged to sell their individual security holdings and to invest in broad indexes and cash instead.

But outside groups are calling for more, saying those changes are an inadequate response to the deficiencies the episode laid bare.

The trading by the officials “reveals how grossly deficient their ethical standards and the code of conduct are,” Dennis Kelleher, president and chief executive at Better Markets, wrote in a letter to Mr. Powell this week, calling for external investigations of what happened. “This requires you to take immediate, concrete and meaningful action, not just P.R. pronouncements of internal investigations and an internal review of the ethics code.”

Mr. Kaplan bought and sold millions of dollars in individual stocks and invested in stock futures, which can allow investors to make bets on whether the market will go up or down, according to his 2020 financial disclosures. Mr. Rosengren traded in financial products tied to real estate, during a year in which he regularly warned the public about risks to that sector. Both said in statements that their investments had complied with Fed ethics rules.

A Fed spokesperson said the Fed’s ethics rules were consistent with what most government agencies followed and in some cases more stringent. But given the special role the Fed plays in finance, many have questioned whether it should have stricter requirements.

Fed officials tend to be sophisticated economists and bankers themselves, and their comments can have an outsize impact on financial markets. The central bank has also taken on an increasingly expansive role: Last year, it rescued or aided the short-term corporate debt market, the long-term corporate debt market, the municipal bond market and money market mutual funds.

That raises questions about what sort of securities its officials should be allowed to own. Mr. Powell, for instance, was heavily invested in index funds and municipal debt last year, based on his own disclosures. His municipal bond holdings had not been widely criticized in years past, but they have received negative attention in recent days because the Fed helped that market for the first time last year.

Mr. Powell said he had cleared all of his holdings with the Fed’s ethics officials.

“Munis were always thought be a safe place for a Fed official to invest,” Mr. Powell said, noting that the idea was that the Fed would never buy munis. He added that the Office of Government Ethics had checked his muni holdings and said he did not have a conflict.

All this poses a conundrum for the Fed, which must weigh what its officials can reasonably invest in, given that its actions influence everything from home prices to the broad stock market.

While there are examples of very high-level officials in government who have put their savings into blind trusts — in which independent money managers buy and sell securities without communicating with the beneficiary about the details of the transactions — those are typically discouraged by the Office of Government Ethics, which calls them “highly restrictive and usually burdensome.” Ethicists tend to instead recommend divesting from individual asset holdings and investing in mutual funds or other broad-based funds.

Many Fed officials, but clearly not all, already do that.

“The system is foolish in the leeway that it gives,” said Mr. Eisen, the former ethics adviser. “The trust system is a recipe for eventual scandal.”

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