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Fed's Powell orders sweeping ethics review after officials' trading prompts outcry

EconomySep 16, 2021 02:05PM ET
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© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, U.S., June 22, 2021. Graeme Jennings/Pool via REUTERS

By Howard Schneider

WASHINGTON (Reuters) -Federal Reserve Chair Jerome Powell has ordered a sweeping review of the ethics rules governing financial holdings and dealings by senior officials at the U.S. central bank, a Fed spokesperson said on Thursday.

Powell ordered the review late last week, the spokesperson said in an emailed statement, following recent reports that two of the Fed system's 12 regional reserve bank presidents had been active investors during 2020, a notably volatile year for asset prices as the country battled the COVID-19 pandemic. Those revelations, originally reported by the Wall Street Journal, prompted senior U.S. lawmakers - including Senator Elizabeth Warren of Massachusetts - to demand more stringent restrictions on such activities.

"Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed Board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials," the statement said.

The rules that guide personal financial practices for Fed officials are the same as those for other government agencies, the spokesperson said. Moreover, the Fed has supplemental rules that are stricter than those for Congress and other agencies that are specific to its work.

"This review will assist in identifying ways to further tighten those rules and standards. The Board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct," the statement said.

Warren, in a Tweet, called the review "long overdue" but encouraged the Fed's regional bank presidents to impose strict rules on their own.

Following news reports on their trading last week, Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren both said they would divest any holdings of individual stocks by Sept. 30 and put the proceeds into index funds or cash.

Their investments were judged by in-house ethics officers to have complied with Fed ethics rules. Kaplan, a former vice-chair of Goldman Sachs (NYSE:GS), has been an active trader since taking over the Dallas Fed in 2015, with multiple, million-dollar transactions in individual stocks each year, according to finiancial disclosures dating to 2016.

Still, their activity drew a sharp reaction given the context of a pandemic year in which tens of millions faced joblessness and the economy was on the precipice of a threatened depression.

The Fed, beginning in March of 2020, rolled out a response that was record-breaking for its speed and scope, with interest rates slashed to zero and open-ended promises to use bond buying and other tools to keep the economy afloat.

The effort stabilized financial markets, underwrote credit to small businesses and helped set the stage for a fast rebound of jobs and economic growth.

It also triggered a record surge of asset prices following a crash early in the pandemic. Between the Fed's efforts and trillions of dollars in government spending approved by Congress, the S&P 500 Index has more than doubled from its pandemic low on March 23, 2020 and is about 30% above the high hit in the previous month.

It is not unusual for Fed officials to hold extensive portfolios. Powell, a private equity lawyer with a stint at the Washington-based Carlyle Group (NASDAQ:CG), has net worth in excess of $17 million and perhaps much higher, according to his latest ethics filings.

But they are not as a rule active traders, and many join the Fed from academic backgrounds or government posts. St. Louis Fed President James Bullard's holdings are modest enough that he hand writes his ethics form. Former Fed Chair Janet Yellen's disclosure was notable largely for its stamp collection.

Fed rules explicitly prohibit trading around the time of Fed policy meetings - when market-sensitive information is distributed - requires securities to be held for at least 30 days and forbids officials from holding bank stocks or funds with holdings concentrated in the financial sector that the Fed oversees.

But broader language in the Fed's internal rules requires officials to avoid even the appearance of conflict or of using their position for personal gain.

For Powell, promoted to Fed chair in 2018 by former President Donald Trump and subsequently a target of Trump's ire for his management of Fed interest rate policy, the revelations come at a particularly awkward time.

His current term as chair ends in February, and President Joe Biden is in the midst of deciding whether to appoint him to a second four-year term.

Among those advocating for a change in Fed leadership, one of the chief arguments has been that Powell, a private equity lawyer, has not been strict enough in his approach to Wall Street.

He has also worked to build strong relationships among U.S. lawmakers and has preached the need for the unelected central bankers to be transparent in their actions and accept oversight by the country's elected officials.

Fed's Powell orders sweeping ethics review after officials' trading prompts outcry
 

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Comments (11)
Ron Tippitt
Ron Tippitt Sep 16, 2021 2:18PM ET
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They got caught insider trading; Bottom line: No One Will Go To Jail;
Jesse Noell
Jesse Noell Sep 16, 2021 1:09PM ET
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Jail Martha Stewart for conspiracy false statements, but not Kaplan and Rosengren! Steal a lot and they make you a king……….Bob Dylan
peter neal
peter neal Sep 16, 2021 12:38PM ET
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They should be forced to place all their money in a savings account and watch it depreciate 6 percent a year. The Fed is a Scam.
Alan Rice
Alan Rice Sep 16, 2021 12:20PM ET
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Can the World TOLERATE an honest Government Employee ?? Stay tuned !!
Matt Brackley
Matt Brackley Sep 16, 2021 12:13PM ET
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good excuse for them to sell everything before taper
Steffen vdm
Steffen vdm Sep 16, 2021 11:08AM ET
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Jerome, the trust of the American people has not been eroded by two dudes doing some trading in 2020.
Eudon Hickey
Eudon Hickey Sep 16, 2021 10:53AM ET
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I believe this is a smoke screen/excuses only, as the “guys” are exiting the markets before the crash
Ac ln
Ac ln Sep 16, 2021 10:53AM ET
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there is no crash where is this promise crash. its impossible to crash because we can print are way out. see loom stock market near ath. stock market cannot crash like 1999. we have the safest secured stock market system that never been hacked or compromised. fear p or n
Gervais Christopher
Gervais Christopher Sep 16, 2021 10:28AM ET
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WAY to late for trust....some of us lost everything in 2008...we HAVE NOT forgotten...
Me comment
Me comment Sep 16, 2021 10:28AM ET
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They only way you would loose everything is if you bailed out of the market at the low. Your fault not that of the FEDS.
Gervais Christopher
Gervais Christopher Sep 16, 2021 10:28AM ET
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Me comment  If, like me, you owned a construction business and was building houses for a living, you lost EVERYTHING. Some of us were millions in debt after the crash. Bankrupcy Laws were then changed so that we could not claim bankrupcy and had to repay all the debt. All the while the 'Big Banks' and all the rich people recived taxpayer $ and were 'bailed out'. I also lost my inheritance because my parents who died a couple of years after the housing crash, had all their worth tied up in their home, as all people did in their time and in previous generations. When the estate was settled i received only 1/3 of what the house was worth. I was robbed of my bussiness and my inheritance by the Federal Reserve. While they received tax payer $$$. So F them. They have NOT paid us back.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 16, 2021 10:25AM ET
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Taper or No Taper, game is over.What Dr. Jerome Bubble said transitory inflation was the inflation due to 2020 low Covid base. But Dr. Bubble is aware of the stimulus lion 🦁 he is riding on. The real inflation is yet to begin when taper starts. Inflation Lion will get him sooner or later. So Dr. Bubble is more likely to act sooner in September because the lion might let him walk free if he gets off the lion sooner than later. Dr. Bubble and the Lion - will be a story in children's book on how not to do monkey tricks with the US economy
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 16, 2021 10:23AM ET
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I always knew it was happening. After all this is the last bull market humans will ever have. Make hay while the Sun 🌞 shines.
Jo Pa
Jo Pa Sep 16, 2021 10:18AM ET
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Fauci and other CDC officials own significant stock in vackseene companies. Conflict of interest.
 
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