By Howard Schneider
WASHINGTON (Reuters) - It is perhaps as predictable as it is problematic: Within days of news that two Federal Reserve bank presidents had engaged in controversial stock trades, one of the fiercest critics of the U.S. central bank's financial system oversight demands new ethics rules that would bar such dealings in the future.
For Fed Chair Jerome Powell, however, it is the wrong problem at the wrong time. Under consideration for reappointment as Fed chief while also juggling how to pull off a critical change in U.S. monetary policy, Powell faces a controversy of the Fed's own making that helps reinforce arguments by progressives for broader change at the central bank.
Powell remains favored for renomination by President Joe Biden, and if history is a guide a decision may come in the weeks between the Fed's policy meeting next week and its two-day session on Nov. 2-3. That would match a point in the calendar when the last two Fed chair appointments have been announced.
Democratic Senator Elizabeth Warren's Wednesday letter https://www.warren.senate.gov/imo/media/doc/Letters%20pdf.pdf to the Fed's 12 regional presidents asking them to "impose strong and enforceable ethics and financial conflicts of interest rules" and send her an action plan "no later than Oct. 15," is at a minimum a distraction to Powell at a time when he is steering the Fed through complex debate over monetary policy.
The Fed meets next week and is expected to take a potentially decisive step that flags likely changes to some of its pandemic crisis programs at an upcoming meeting. It is the type of moment that requires deft communication at the Fed chair's post-meeting press conference - now muddled by likely queries about his colleagues' investing habits and the possible blow to public trust.
“Institutionally, it’s a bad look,” said Tim Duy, chief U.S. economist at SGH Macro Advisors and an economics professor at the University of Oregon. "It’s better to get ahead of this."
Powell has moved to do so, launching a broad review of the Fed's rules governing investments by senior officials. [L1N2QI1D0]
But unless change comes quicly, Warren's direct demands set up a possible clash with a key Democratic lawmaker when Biden's eventual Fed pick goes for Senate confirmation.
Warren, a member of the Senate Banking Committee, which will provide the initial vetting of the nominee, voted against Powell as Fed chair four years ago, has criticized the Fed's approach to financial regulation on his watch and has yet to state an opinion about his possible renomination.
She credited the move by Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren to sell the investments in question, but said a decision "made amidst an ethic firestorm" left no guarantee "that Fed officials are acting solely in the public interest, not based on their own financial interests."
A SETBACK?
The security trades last year by Kaplan and Rosengren during a pandemic year when tens of millions faced unemployment were judged to have complied with the Fed's code of conduct.
The Fed's 12 regional banks are part of the Federal Reserve system but operate as quasi-private entities with their own boards of directors, many drawn from the banking industry. The presidents of those institutions share five rotating votes on monetary policy, alongside up to seven members of the Fed's Washington-based, presidentially appointed Board of Governors.
Representatives said the regional reserve banks were reviewing Warren's letter.
Regardless of its impact on Powell's possible nomination, the controversy is a blow to a pair of issues the Fed chair has put at the center of his tenure - building public trust that the Fed is managing the economy for the country as a whole, not just its investing class, and building support for the Fed's independence among congressional lawmakers critical of the central bank's enlarged footprint in the economy since the last crisis.
He had arguably made headway on both.
He has held more one-on-one meetings with lawmakers than his immediate predecessors Janet Yellen and Ben Bernanke. In recent days he has picked up renomination endorsements from senators of both parties.
A revamp of monetary policy last year put new emphasis on job growth and led many supporters of Biden, including progressive, labor-focused economists https://www.politico.com/news/magazine/2021/09/15/progressives-biden-jerome-powell-fed-chair-511947, to argue that Powell had earned a second four-year term when his current one expires in February.
Yet among those opposed to him, one of the chief complaints is his perceived closeness with Wall Street and a willingness to take a lighter touch toward the regulation of banks - and now, perhaps, toward the regulation of other central bankers.
"Powell still hasn't acted. He has not yet actually cut off the flow of insider information to Rosengren and Kaplan," said Jeff Hauser, founder of the progressive Revolving Door project, which opposes Powell's renomination in favor of Fed Governor Lael Brainard.
"The immediate and necessary, even if insufficient, step would be to place them on administrative leave...." said Hauser. "This will just harden the degree of distrust among people who think about financial regulation, insider trading and ethics law."